Being a homeowner comes with much satisfaction—but a hefty price tag as well. And since most of us are unable to pay for a house in full, we are saddled with a mortgage as soon as we’re handed the keys to our new home. This debt is unavoidable, so now the question becomes how to handle it moving forward.
In general, we know the basics regarding debt: debt reduction is a healthy financial goal (especially when it comes to high-interest debt such as credit cards or student loans), and it’s important to minimize debt for many reasons. But do these principles also apply to mortgages? Is it better to put every extra dollar toward your mortgage or invest that money instead? Like most financial decisions, the answer will depend on your unique situation.
First let’s discuss some pros and cons of each strategy.
The Best Use Of Your Funds
If you are considering paying off, or paying extra on your mortgage, we can assume you have extra cash each month, or a lump sum you need to make a decision with. Of course, leaving additional funds sitting in a savings or checking account where you’re earning less than a percent of interest would never make good financial sense. You want your money to work for you, so the question to ask is, “What option will give me the biggest payoff?” Many clients choose the simple comparison between their mortgage rate and the rate of return on their investment or portfolio. However, the decision goes far beyond that. Paying down your mortgage is akin to investing moreinto your home. How will your home’s appreciation compare to that of your portfolio? What role will that appreciation play in your long-term goals?
Like most financial decisions, there are plenty of factors that could affect the outcome. And as we all know, even the best estimates aren’t guaranteed. It is important to run a thorough analysis and consider a variety of factors: the current interest-rate environment, potential taxes on new investments, the loss of mortgage interest deduction (if applicable), your risk tolerance, private mortgage insurance, among the other elements of your financial life. An experienced financial advisor can provide the needed guidance and direction when it comes to such a decision.
Weigh Your Options
There are some pros and cons to each choice that go beyond the raw math. Liquidity is a significant pro for investing since you’ll have greater access to the funds in case of an emergency or for your other financial goals. By placing the money toward your mortgage, thereby investing more in your home, your options become more limited. The only way to access those funds would be to sell your house or refinance your mortgage.
The advantages to paying down your mortgage are obvious. The additional cash flow created from the savings can be redirected to your longer-term goals or strengthen your monthly budget once retired. The savings created could also potentially be used to offset your healthcare or long-term care coverage once retired as well.
Is Being Debt-Free Important To You?
Paying off your mortgage can have other non-financial benefits as well. Transitioning into retirement debt-free often provides clients with peace of mind at a time when they are feeling financially vulnerable. Living solely off one’s investments or Social Security can be intimidating, and having one fewer obligation can help with that transition. So while the numbers don’t lie, they often don’t tell the whole story.
It’s Not All Or Nothing
Considering these options, what’s the best one for you? For some, a combination of these two choices may make the most sense. This could mean adding more money to each mortgage payment to bring down the principal while still putting the bulk of your extra money toward other investments.
Before taking any action, you must take several variables into consideration. And whenever you make an important financial decision, it’s always wise to consult with a financial advisor first. So before you pay off your mortgage, we at GLH&C Financial Services would love to help you navigate your options. We can provide personalized financial planning advice, and maybe even show you alternative investment strategies you hadn’t considered. Let’s get you back to enjoying your home and being a homeowner!
Email me at jim@glhcfinancial.com or give me a call at 916-276-8677 to see if I am the right fit to help you pursue your ideal financial future.
About Jim
James Callens is a financial advisor at GLH&C Financial Services, a full-service, comprehensive wealth management firm. Jim has over 30 years of experience in the financial industry and uses his extensive resources, knowledge, and experience to help his clients experience simplicity and clarity in their financial life. Jim spent over 20 years working for GE Financial Advisors, both in their insurance services department and as a regional manager and financial advisor. He took part in GE’s Six Sigma Quality Training program and completed the National Association of Life Underwriter’s four-year LUTCF course. Jim also earned his certificate in financial planning from the University of California at Davis. In 2011, Jim combined his own firm, Callens Financial Group, with GLH Financial Services, creating GLH&C Financial Services, so he could provide even more value to his clients.
Jim is a member of the Financial Planning Association of Northern California and National Association of International & Financial Advisors (NAIFA). He has served as a board member of several nonprofit organizations and has been involved in Cub Scouts leadership and youth sports coaching. Jim lives in Folsom, CA, with his wife, Melissa, and his four children, Jacob, Kristen, Grant, and Andrew. Together, they enjoy outdoor activities such as kayaking, bicycling, and vacationing at Lake Tahoe. To learn more about Jim, connect with him on LinkedIn.