I’ve heard of mortgage burning parties but would categorize them along with the Pony Express and covered wagons. Things from a bygone era.
There was a time when mortgage burning parties were common. It was like putting the cherry on top of the American Dream. And this burning thing was not figurative.
Once that last house payment was made, the mortgage company would send the paper document back to the borrower stamped, “Paid in Full.” This would be such a cause for celebration, the new homeowners would invite everyone over to watch them set it on fire, all the while cheering while it went up in smoke.
Things have changed, especially in recent years as mortgage rates have dropped so low. There are some financial advisors who actually advise their clients to not pay off their mortgages, and invest the money instead to build greater wealth. Of course, this action provides a healthy income for the advisor who collects commissions when a client takes that advice.
You may be tempted to follow that advice, refinancing and stringing out your mortgage for as long as possible—even well into your retirement years—while you try to eke out a higher return on your investments.
Before you decide to stick with minimum payments, consider the following benefits of having no mortgage payments by the time you reach retirement:
1. Risk-free, guaranteed, high-yield investment
Show me any investment advisor who can offer you an investment that is risk-free, guaranteed and returns a high yield. Well, I can.
First, let’s agree that there are only two ways to increase your net worth: Increase assets or decrease liabilities. If you have debt, your net worth will increase at the very same rate if you increase your assets or decrease your liabilities.
Let’s say you receive a $1,000 bonus with which you buy shares in a mutual fund. Your net worth increases by $1,000. If instead you repay $1,000 of debt, your net worth still increases by $1,000.
Risk free.
Using the example above, let’s say you bought ABC stock instead of paying off $1,000 of debt. Next month the stock drops by 50 percent. Now your stock is worth $500. But if you would have paid off debt with that $1,000 and ABC stock tanks, it does not affect your net worth at all. That $1,000 “investment” in your debt increased your net worth without any risk.
High-rate of return.
Investing in your debt pays you a guaranteed rate of interest equal to the amount of the interest you were paying on the debt. Really!
If your mortgage is subject to 5 percent interest, every dollar of principal you pay off means you won’t have to pay interest on it next month. You get to keep the 5 percent you would have paid. That’s your return on investment. Once you pay off your mortgage, the money you are not paying out in interest on it every month is the return you get for investing in your debt.
No minimums.
If you have an extra dollar, you can invest it in your debt. Not true of investing in the stock market. It’s not unusual for a mutual fund to require an initial purchase of $1,000 or more.
Every dollar you invest in your mortgage puts you that much closer to owning your home free and clear. Once paid, it’s yours no matter what happens to the economy or the stock market.
2. Peace of mind
Once you eliminate your mortgage, you are able to live “rent-free.” You have just eliminated your biggest monthly bill. You also don’t need to agonize about whether your investments are outperforming the interest you are paying. Owning your house free and clear reduces a huge amount of stress, which is why you want to make sure you do this before you retire—the season of your life when you need to experience true peace of mind!
You want to be mortgage-free to increase your choices in retirement. If you retire with a mortgage and then fall behind on your payments on your fixed income, you’ll lose it and be forced to move.
Without a mortgage, you have complete control over where you live. You can downsize or move as soon as you feel that it’s best for you, or choose to stay in your current home for the rest of your life.
Where you live can play a big role in your retirement expenses, so having the choice to stay or go gives you additional control over your finances.
Aggressively paying down your mortgage will help you build equity more quickly. You’ll be able to avoid paying for private mortgage insurance sooner because you will build equity in your home faster.
It could also mean being eligible for the best rates offered by the marketplace by being under the conforming loan limit.
You may be able to take advantage of lower rates whenever lenders are offering more competitive terms by refinancing your existing mortgage.
3. Forced savings
Because historically real estate is a hard asset that appreciates in value, paying it down rapidly creates forced savings. The appreciation also acts as a return on investment.
Making the decision to have a debt-free retirement means you will have to save more to gradually get there. This not only helps you pay less interest, but it also motivates you to cut down on wasteful spending over the years.
For many people, the added savings they are able to accumulate more than makes up for the interest they could get by investing the extra payments.
4. Reduce risk, improve options
Taking less risk means fewer chances that things can go wrong. Even if you are an investing guru all your life, everybody’s mental and physical abilities decline with age.
You may be able to make more in the stock market than paying off your mortgage now, but this may not be true forever. Unfortunately, many people don’t realize the decline until the damage is irreversible.
Retiring your mortgage when you retire is a prudent choice because by so doing, you are limiting the chances of a catastrophe.
5. Safety net of last resort
A fully paid for home gives you another option that you should guard jealously: a reverse mortgage.
Having access to the equity in your home without having to leave your home or even make monthly payments, could be the difference between a joyful and peaceful end of life and a season of misery for both you and your family members. It may not, however, be as simple and glamorous as the late-night TV celebrity pitchmen make it sound.
A reverse mortgage, while often advisable, can be very expensive. The fees and high rates of interest often escape the attention of seniors. The numbers can be staggering. This is why you want to make sure you keep that option as your safety net of last resort—not a means to get you a pile cash the day you turn 62.
Just keep in mind that to get a reverse mortgage you cannot have an existing mortgage, which becomes yet another reason you need to get busy paying off your mortgage. And, so you can send out those party invitations.
Got a match, anyone?
This article appeared originally in the Debt-Proof Living Newsletter in February 2013.
"Debt-Proof Living" was founded in 1992 by Mary Hunt. What began as a newsletter to encourage and empower people to break free from the bondage of consumer debt has grown into a huge community of ordinary people who have achieved remarkable success in their quest to effectively manage their money and stay out of debt. Today, "The Cheapskate Monthly" is read by close to 100,000 Cheapskates. Click here to subscribe.
Publication date: March 20, 2013