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A question we often hear from clients, especially as they near retirement, is “Should I pay off my house?” The short answer is – it depends. There are a complex mix of emotional and financial factors that need to be considered before coming to the right decision for you and your specific circumstances.
First, let us address the financial considerations. You need to compare the interest rate you are paying on your mortgage to the expected rate of return on your money if you chose to save or invest instead of paying it off.
If your risk tolerance is such that you would keep the money in the bank earning interest, then it is likely the interest you would earn on your savings would be substantially less than the interest you are paying on your mortgage. In that case you would be better served paying off the mortgage and eliminating the cost of the difference in the interest rates.
If you are willing to accept the risk of the ups and downs of investments in the stock market or a blend of the stock and bond markets, then there is probably a different answer. While no one can guarantee you what will happen with your investments, most people expect to make more over the long term with their investment portfolios than they are paying on their mortgage. This would make it advantageous to simply continue to pay off your mortgage as you go, and leave the lump sum invested.
We are humans with real emotions, not economic robots. Regardless of any financial advantage, you may be drawn to the comfort of having a paid for home. While it is important to know what it may be costing you in foregone earnings on your investments, that peace of mind may be worth the cost to you. If it is, then paying off your mortgage may be the right answer for you.
If you are considering this, please call us and we can help you think through the issues and come to the best decision for you.