The Mortgage Go To Guy!!

This Sunday’s USA Weekend had an advice column answer from Advice Columnist Sharon Epperson regarding paying off one’s mortgage early. Here’s the LINK.

The writer stated that she and her husband are in their late forties (49 & 48) and they are considering an option to pay off their mortgage by age 56*. The objection came from a friend who said that they should not do so because they’ll lose their Mortgage Interest Tax Deduction if they do so.

Ms. Epperson was quick to point out that this is a weak argument… and I am only partially agreeing with her here. It is weak because it is only part of the total Mortgage Planning Picture.

The rub in this is that Ms. Epperson really didn’t have much to go on in the short letter to QUALIFY this couple financially. She was not told of their financial position, their incomes, their current savings or their future goals. Ms. Epperson basically said - Full steam ahead; Pay it off and to heck with the deduction.

Whoa there Nelly!!

First of all, the entire picture needs to be broken down. Debt isn’t always bad - there is good debt. Mortgages (that are paid on time every month) are good debt. They help keep your credit up and they’re relatively low rates of interest. Bad debt are credit cards or other high interest rate revolving debt.

Eliminating good debt too early can hurt you down the road. I have had several clients come to me later in life trying to buy in a retirement community just to find out that their lack of debt due to “smart planning” was more due to “Depression Era Economic Propaganda” and is putting them in a bad predicament when trying to buy a house, a car or anything else they need to finance!

Second… If this couple is self employed or has high income reported from investments, they might NEED the Mortgage Interest Tax Deduction. Their friend may not know their whole picture but he might know more than they mentioned in the article. If they are self employed they may need every deduction they can get!

Call your CPA first and map out the pros and cons of giving up this mortgage interest tax deduction over the short and long term. You can always set aside the money and if it makes sense when you’re 56 then pay it off in a lump. During your prime earning years, it may not make as much sense though!

Third… if they are already maxing out their IRA and 401K every year and have otherwise planned well for their golden years, then paying it off isn’t necessarily going to put them into a better position.

From 56 on will a few thousand more per year make that big a difference?? That’s not a lot of time for that money to work for them. A Financial Planner may have a better strategy with how that money could work for them today OUTSIDE the mortgage.

Fourth… if they are not contributing at all or enough to retirement then frankly shame on Ms. Epperson. She could have started with, how much are you contributing NOW because if they’re not preparing today then they are breaking the Mortgage Planning Golden Rule:

You can finance a car. You can finance an education. You can finance home improvements.
And you can finance a House. You CANNOT finance Retirement!

This is the ultimate consideration for the writers and the advice comlumnist in giving them proper advice. You may get to a point when you have no income and either you have the money saved or you don’t.

Also note the * near the year 56? 56-49 = 7 years. That is 7 years of compounding Interest they may be losing out by not investing that money in a growing asset rather than trapping it in their house where it does not grow and is illiquid.

(* 7 is a powerful number in financial planning. If you have an investment making 7%,
it doubles every 10 years due to compounding. n investment making 10% doubles every 7 years!
…where will you find an investment making 7-10%?? Real Estate!)

Remember a fundamental rule of Real Estate Investment is that the Asset of Real Estate can appreciate even fully leveraged. The cash you put into that asset just sits there though!! If you separate the cash equity from the Asset (or just don’t pay more into it) then you can use that cash in another investment where it can grow wealth!!

For instance, instead of paying off the last $200,000 of your mortgage, put that money into an annuity at a similar rate as the mortgage itself and then schedule it to pay your mortgage for you with the interest…AFTER you retire!!

Or buy an investment property (or 4) that can cover your mortgage with its cash flow! While rates are low and prices are too, why not buy now instead of waiting 7 years?

Fifth… and most importantly… once the couple reaches their retirement and possibly has no way of creating income besides their passive retirement income, it will be much harder for them to qualify for a mortgage if they need emergency funds - or simply run out of the carefully laid aside retirement funds because they didn’t figure they’d live to 100.

If they cannot get to those funds affordably, then they can either lose the house to foreclosure or to a reverse mortgage - either way they’re giving up something that they worked hard to maintain for years.

(I know you’re all going to flame me over the reverse mortgage comment - but it is the truth no matter how they sell it!)

If they can’t access the cash then why again did they put it in there in the first place?

Ms. Epperson: Liquidity is very important in Financial Planning. Remember “Cash is King”…

For more information on Savvy Mortgage Planning, contact your favorite, local Mortgage Broker - The Mortgage Go To Guy!!

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David A. Podgursky, MBA
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