NEW YORK (MainStreet) -- This one should be easy. Debt is bad, right? We should work as hard as we can to pay off our mortgage and race into retirement debt free. But wait. Not all experts agree. Brandon Opre, a financial planner in Fort Lauderdale, says there are good reasons for not being in a hurry to pay off your home.
“It's one of the country's biggest tax breaks -- deducting the mortgage interest,” Opre tells MainStreet. “Why be in a hurry to give that up? Another reason: your payments do not increase with inflation. Presuming one has a low fixed-rate mortgage, unlike most things in our lifetimes, the cost of the mortgage does not increase. A $2,500 mortgage payment in 2000 is the same payment in 2025, and the house has probably appreciated in value. In other words, a mortgage is not adjusted for inflation, nor increased over time.”
Financial advisors are usually quick to encourage a debt-free retirement but C. Eric Christiansen, a CFP in Spokane, admits that’s not always how life works out – and having a mortgage during life after work is not all bad.
“Financing is fairly cheap at this time -- let other money in your portfolio work for you knowing you can pay the mortgage off down the road,” Christiansen says.
“Continuing to carry a mortgage is okay, but is it good?” asks Katherine Dean, a managing director of wealth planning for Wells Fargo Private Bank. “Well, the answer is -- it depends. There can be potential pros like continuing to have a mortgage interest deduction. There can also be cons like having less cash flow or experiencing lost opportunity cost because you are unable to use the money in other ways.”
Dean also cautions those who may be tempted to tap IRA or 401(k) assets in order to pay off a mortgage before retirement. Penalties can kick in for retirement plan withdrawals prior to age 59 ½ -- and taking large distributions from a qualified plan in a single year may push you into a higher tax bracket.
But more than one advisor notes the peace of mind that comes with owning your home outright. Plus, being mortgage-free allows more financial flexibility. Your monthly expenses are lower and easier to manage, and the home equity allows a budget backstop.
“There can be an emotional component behind the desire to live in a home that is owned free and clear,” Dean adds. “For others, continuing to receive a tax break through the mortgage interest deduction is attractive but be aware that the benefit may not be as big as you think.” Dean says since mortgage interest is frontloaded, the tax deduction slowly diminishes as the debt is paid down.
Ron Vejrostek, a tax advisor in the Denver area, says having a mortgage in retirement is “almost always a bad idea.”
“Many would have you believe that it is always good to have a mortgage and keep your cash working, and they tout that it is beneficial because of the tax write-off. In the end, taxes are always cheaper than interest,” Vejrostek tells MainStreet. “For example, at best, for most people (those in the 25% tax bracket), if they pay $10,000 in interest, the tax break is only $2,500 -- and that's the best case scenario. “In reality, you only get a break on the amount that exceeds the standard deduction.”
He runs the numbers. Say a married couple over the age of 65 pays mortgage interest and claims total itemized deductions of $18,000. The standard deduction is $15,100 -- so the tax break is just the $2,900 difference.
“Considering there are no ‘guaranteed’ investments that pay more than the mortgage interest rate it doesn't make sense to carry a mortgage,” Vejrostek says. “End result, I would always rather pay taxes than interest.”
-- Hal M. Bundrick is a Certified Financial Planner and contributor to MainStreet. Follow him on Twitter: @HalMBundrick