February 25, 2024

This article was published more than 2 years ago
As the stock market skyrocketed and mortgage interest rates fell, financial experts encouraged people to put any extra money they had into their retirement accounts rather than pay off their mortgages early.
The reasoning behind such advice was twofold. Homeowners could potentially earn more by investing extra funds in the bull market than they saved by paying down their mortgage. And however much they spent on mortgage interest, they’d get some of the money back at tax time.
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I’ve never been a fan of this advice, for a few reasons.
Stocks have more risk. Unlike the stock market, paying off your mortgage early offers a guaranteed return. Shorten your mortgage by paying it down sooner, and you pay less in mortgage interest.
And, as we’ve seen since the coronavirus began spreading, the stock market can be extremely volatile as investors respond to economic downturns by fleeing to safer investments. Over time, investors have historically seen positive returns, but in any given period, that’s not a guarantee. We are in one of those uncertain periods now.
The mortgage interest deduction isn’t as significant as you think. Keep in mind that this tax break is a deduction, not a credit. A tax credit reduces, dollar for dollar, the taxes you owe. A deduction eliminates only a percentage of your income subject to taxation.
The vast majority of homeowners don’t claim the mortgage interest deduction at all: They take the standard deduction rather than itemizing. You have to itemize on your return to take the mortgage interest deduction.
The 2017 Tax Cuts and Jobs Act nearly doubled the standard deduction, with the result that fewer taxpayers itemized deductions on their tax returns.
The tax law reduced the share of taxpayers claiming the mortgage-interest deduction from 23 percent to 11 percent, according to the Institute on Taxation and Economic Policy.
There’s value in not worrying about the roof over your head. If you’re a homeowner, you can weather a financial storm a lot longer if your housing expenses are confined to a manageable property tax bill and a homeowner’s insurance premium.
“It’s been a great feeling ever since we went to the bank to make the very last payment,” a North Carolina reader wrote. “Right now we feel incredibly fortunate that we don’t have any monetary stress and know that if something happens to our — or even one of our — jobs, we’ll be okay.”
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With unemployment up and tens of millions of folks out of work, I wanted to revisit the debate about paying off a mortgage early with financial adviser Ric Edelman. We’ve had many long and friendly discussions about this issue.
I asked Edelman recently if he had changed his mind given current economic conditions. He doubled down, arguing it’s still better for people to invest extra funds rather than tying up the cash in a home, creating a situation referred to as being “house rich, cash poor.”
“None of that money is helping you pay your bills. I have all this money in investments, readily available, liquid and accessible,” he said. “You know: You’re house rich. I’m investment rich.”
It’s true that when a crisis hits and you lose your job, you’ll need cash, and you may not be able to access the equity in your home.
“I just refinanced our house to a 30-year fixed rate at 2.875 percent,” Edelman said. “Now, why wouldn’t I want to keep that mortgage for as long as I can? I’m going to take the thousands of dollars in savings from the lower payments and throw it into investments.”
To Edelman’s point, here are some things to consider before paying off your mortgage early.
● Do you have high-interest debt? If so, tackle this first before you make extra principal payments on your mortgage.
● Do you have an adequate emergency fund? “The problem is that there are some people who have only paid off their mortgage right to the point where they have nothing left,” he said. “They have no cash because they’ve diverted every dollar to getting rid of the loan. And today, they’re out of work with no income and no savings or investments, but they have a ton of home equity. Well, that’s not putting food on their table.”
Edelman’s right. But, I’m right, too.
So, don’t cripple your cash reserves on a quest to be mortgage-free. But if you can save, invest and get rid of your mortgage when an economic storm hits, you’ll be in a better position to ride it out.
Have a question about retirement or personal finance? Join Michelle for an online Q&A every Thursday at noon Eastern. Readers may write to Michelle Singletary at The Washington Post, 1301 K St. NW, Washington, D.C. 20071 or michelle.singletary@washpost.com. To read previous Color of Money columns, go to wapo.st/michelle-singletary.


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