Mortgage: To Pay or Not to Pay

By Doug Gibson, Financial Advisor

Dave Ramsey is just plain WRONG!

I came across an article this weekend from a very well-known financial commentator that outlines 7 “tips” for paying off a mortgage faster. While these tips, do illustrate a path to paying down your mortgage faster, the only question that any homeowner should be considering is SHOULD you pay down your mortgage earlier? Despite what ole Dave would have you believe, the answer is NOT so simple and can be different for every homeowner, which is why blanket strategies often touted by commentators can be extremely dangerous.

On the surface, the prospect of no mortgage payment sounds appealing. But the big question is, does eliminating my mortgage payment actually improve my cash flow and increase my chances of retirement success? Unfortunately, for a majority of people (and for Mr Ramsey) the answer is typically NO!

There are a couple of reasons for this. First, once you make additional payments to a mortgage you lose earnings power on those funds. You are essentially sacrificing potential growth to pay off your mortgage. It doesn’t take a financial calculator to determine if you can grow your money at 6%, and your mortgage rate is 5%, you are earning 1% on your money.

The next major factor at play here is liquidity. Once you make a payment on your mortgage, you lose liquidity. That means the only way you can access those funds is to sell your home, or refinance. Often times, that tradeoff does not work in the homeowners favor.

Lastly, there are still tax advantages for mortgage interest so homeowners can deduct the interest they pay each year on their taxes. You lose this deduction once the home is paid off.

Now I don’t want you to read this and believe that I never advise homeowners to pay off their mortgage early because that is certainly NOT the case. As I mentioned in the first paragraph, the answer is different for every homeowner. For our clients, we create very detailed financial plans that analyze scenarios like this so you can easily determine what makes the most sense for you. The best approach is to work with your advisor to create a financial plan that will help you not only maker these decisions, but to help you understand the implications of each outcome.

At the end of the day, providing blanket financial advice to an entire audience without knowing their critical details is extremely dangerous. I would encourage everyone to discuss their situation with a financial professional who understands your goals and lifestyle to help you determine if a strategy like paying off your mortgage early is truly in your best interest.



Securities and investment advisory services offered through World Equity Group, Inc. Member FINRA and SIPC, a Registered Investment Adviser.  Exponent Prosperity Accelerator Advisors, LLC & SMART Group Houston is not owned nor controlled by World Equity Group, Inc.