By Bill Reiner, CFP®, ChFC®
Is there such a thing as good debt? Most of us know what bad debt is, but what exactly is good debt? Simply put, good debt is used for something with long-term value, something that increases your net worth, or something that helps generate income. (1) Does a mortgage qualify?
The basics are common sense: 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 apply to mortgages? Is it better to put every extra dollar toward your mortgage or invest that money instead? Like most financial choices, the answer will depend on your unique situation. Let’s go over the 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 more into 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.
Weighing 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
What’s the best option for you? For some, a combination of these two choices may make the most sense. Maybe that looks like adding more money to each mortgage payment to bring down the principal while still putting the bulk of your extra money toward other investments.
Several variables must be considered before taking any action. And whenever you make an important financial decision, it’s always a good idea to consult with a financial advisor first. We at Reiner Financial Group would love to help you navigate your options before you pay off your mortgage. We can provide personalized financial planning advice, and maybe even show you alternative investment strategies you hadn’t considered. Schedule a free 30-minute consultation with us here or reach out to us at (215) 340-2360 or firstname.lastname@example.org. We look forward to speaking with you soon!
About Bill Reiner, CFP®, ChFC®, Financial Advisor
Bill has been in the financial industry since 1995, earning numerous professional designations, including the Certified Financial PlannerTM Certification in 1999. Clients work with Bill because of his honesty and unwavering devotion to superior client service. He helps clients discover what financial strategies work best in helping them achieve their goals and objectives. When taking on new clients, he works diligently to gain their trust and help them understand the solutions he recommends.