Recently, on the NewRetirement Facebook group, Linda asked about what she should do with a recent inheritance. She asked whether she should pay off her mortgage or invest.
She wrote: “I am 77 and have a mortgage with $150,000 left on it. I have inherited enough money to pay if off. Should I? The mortgage is at 4.35% interest rate. ”
It is a good question. Making the best financial decisions can be like playing a chess game. There are long and short-term consequences to every move. Keep reading to see what members of the group had to say about Linda’s question.
Arguments in Favor of Paying Off the Mortgage
For many people, paying off the mortgage was a no-brainer for the following reasons.
Peace of mind
The most popular responses — by far — were those that argued that the peace of mind that comes with being mortgage-free is worth a lot more than the potential for increasing wealth.
Here are some of those arguments:
Mike wrote, “I was in a similar situation and decided to pay off the mortgage. While the math’ might suggest that it is better to invest, there is a huge relief of having NO DEBT. I have no regrets and would make the same decision if I had to do it over again.”
Rosemary delights in being mortgage-free, “I have no mortgage, and love having no debt.”
“I became mortgage-free last May, and I say pay if off,” says Cynthia.
Cheryl says, “Peace of mind has the greatest value. Pay off the mortgage and be grateful you own your roof.”
Greg writes, “You can’t put a price on peace of mind.’ Pay it off.”
Poetically Ted says, “The grass feels softer and the view from the deck is prettier when the house is paid for.”
Stock market returns are not guaranteed
“There is no guarantee the market will go up,” wrote Peter.
Reed philosophized, “Mathematically, you should invest the money. However, psychologically, you may want to simply pay off the mortgage.” He continued, “For me, I paid off my mortgage because I ‘feel’ like the market is near a peak. The feeling with no mortgage burden is worth a lot to me.”
Burt is not a fan of risk, “I agree that putting it into the market is probably too risky unless you’re certain you can stand five more years of a market correction. I suggest using it to pay off the mortgage as well as taking care of any home repairs.”
Bill turns the question upside down to argue for paying off the mortgage. He says, “If your home was already paid off, would you take out a second mortgage (home equity loan) of $150,000 to invest in the market? I wouldn’t.”
Jim writes, “Paying off the mortgage results in a risk-free’ rate of return of 4.35%. Again, that is risk-free. Anybody asking you to compare that return with a stock market return (hint: NOT risk-free) is being disingenuous. That’s not somebody you want to listen to. They don’t understand risk.”
Ronald advises, “Always go for the SURE thing versus a possibility of getting better returns.”
Improved cash flow
Jeff argues that when paying off the mortgage, “You will get the mortgage payment back in cash flow.” He suggests, that you “just remember to figure out how to use the extra cash savings.”
Julie agrees, “Investing it is a gamble. Owning your house is a sure thing. At 77, I’d pay it off and feel free. I am 50, paid mine off and now have extra cash-flow to enjoy and/or invest.”
Brokers and some advisers want you to keep money invested for the wrong reason
While you are likely to do better financially by investing rather than paying off the mortgage, many people pointed out that financial advisers have a vested interest in you investing. If you are using an adviser, they make money if you invest. They don’t make money if you pay off the mortgage.
Peter says, “Paying off the house solves the stress of wondering whether your financial adviser (who likely makes 1% or more from money he manages) is giving advice that helps him and not you.”
Arguments in Favor of Investing
Some people said there were good reasons to keep a mortgage and invest the money instead.
Wealth accumulation
Adviser motivations aside, if you are paying 4% interest on your mortgage and can earn an 8% return on investments, investing improves your wealth by 4% over paying off the mortgage. The math is pretty simple and many people made that point.
Jill argued that investments will likely earn more than the mortgage costs, “I would bet heavily that the long-term returns from the market will exceed 4.35%. Just about any decent investment will exceed your mortgage rate.”
Sandra, 56, could relate. In a similar position, she opted to invest. “I refinanced and invested the money but I am only 56.” What does age have to do with it? At 56, Sandra likely has many years ahead for the money to grow and recover from any potential dips in the market.
“History says returns will be better than the mortgage interest,” said Vicki.
Dean has done well with investments. He says, “I’m 66. Not bragging but earned 22% on S&P funds versus 2.75% mortgage. I have made a lot more with investments than I would have saved by paying off the mortgage.”
Flexibility
John wrote, “Paying off the mortgage makes the money inaccessible (unless you sell or get a new or reverse mortgage). It is not necessarily about the rate of return. Think about your cash flow and when you might need or want to spend the money.”
Kathryn is more direct. She says, “How much cash do you have in retirement accounts? If little to none, I’d keep the cash.”
Doug wants to keep options open. He says, “I would rather have the $150,000 than the bank.”
Inflation
If inflation stays high, there is good reason to maintain debt. Derrick explains, “In an inflationary market, those with low-interest loans may see their loans become essentially interest-free, if the inflation rate is higher than the interest rate. And, if you get to itemize and write-off your mortgage interest as well, this is a no-brainer.”
Donald agrees, “Inflation at 5% works in favor of not paying down.”
Other Options for the Money
Some respondents had other insights about how Linda should approach the situation.
Spend on happiness
Stacy had a very popular response, “I’m a nurse so my perspective may be different. I see people at the end of their lives, and it has enlightened me to a few things. You never know when you will be gone so does having the cash handy give you more security or more ability to do what makes you happy? You can’t take it with you. I would keep the money available unless you are struggling to make the payment. Lastly, you’re 77, isn’t there a dream you may have that you should do before you are unable? A trip? A horse? An art class?
Ron agrees, “Use the money in a way that makes you happy. At 77, it’s all about the best days you can muster for your happiness¦”
Virginia advises, “Go enjoy. Life is short.”
Refinance the mortgage
While interest rates are rising, a mortgage at 4.35% is still rather high. Refinancing debt into the lowest possible interest rate is always a solid financial move.
“At a 4.35% interest rate, the real question is, why aren’t you refinancing?” wrote Steve.
Split the difference
Mark suggests a compromise, “How about splitting it up? Pay $75k towards mortgage and invest the other $75k. Yes, if the market corrects, some of that will go down. However, if you invest in blue chips or known good companies, they probably won’t take as much a hit as some others. Diversify the investments. This plan meets both the psychological relief of eliminating debt, but also gives you a chance to get investment returns.”
Make the decision based on your long-term care goals
A few people noted Linda’s age and suggested that she consider making the decision in light of her long-term care goals. She could invest the money and use the principal and returns to fund care if she needs it. Or, she could pay off the mortgage and then get a reverse mortgage or sell the home to fund care.
Larry writes, “70% of Americans will need some sort of assistance before they die. And, it is expensive. Way too many people burn up all their assets and die broke in a nursing home.”
Make a decision based on your personal goals
Jeffrey thought that the decision should be based on personal goals and suggested a good framework for making a personalized decision: “If you are 1) comfortable with your lifestyle at your current cash flow with the mortgage payment, 2) if you have a purpose for the money, like travel, or 3) if you aren’t worried about inheritance, then forget the mortgage and investments, have some fun with the money. However, if you are worried about living a long time and potentially running out of money, invest it. Or, if paying off the house would make you feel better, then do that.”
Rebecca had another list of questions to ask: “Do you need to make more money, or are you doing well as it is? If your home were paid off would that give you breathing room in your cash-flow? Do you need that breathing room? Are you prepared if you need long-term care? Would owning your home work better, or do you need to maximize your returns and take some risk to do that? Only you know your situation, and therefore you have to think through what is best for you. What are your goals and what makes the most sense for your life?”
And, Pat suggests, “There are good reasons for either option. The best move is the one which makes YOU the most comfortable.”
Make a decision based on actual projections
As Dan said, “This is an unanswerable question without knowing your full retirement planning details and goals.”
Once you understand your goals, you can assess the financial aspect of the decision by using the NewRetirement Planner. Run scenarios for:
- Paying off the debt
- Refinancing
- Spending
- Investing the money
This process will help you:
- Assess the financial implications of your options
- Imagine how you will feel in the different scenarios
There are not any right answers, only what is right for you.
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