Many individuals set aside sizeable amounts of money for retirement with plans to use the funds to pay off their mortgages. However, you have more than one option for those funds, and it may benefit you to explore all options before making a decision. While planning for retirement funds, you should consider investment opportunities, benefits of paying off high interest debts, the pros and cons of mortgage interest, and whether you want your home to remain in the family.
Investments
Imagine you have $300,000 set aside to pay off your mortgage. But rather than using those funds to do so, you instead invest that money. Sure it is tempting to stop making a monthly payment, but what if that $300,000 earned a hypothetical 6% for the next five years? You would have a little more than $400,000. Yes, your house may appreciate in value over the same period of time, but you should consider all your choices for that lump-sum of money.1
High Interest Rate Debts
Before you pay down your mortgage, any extra cash might be better suited to paying off other kinds of debt that carry higher interest rates, especially non-deductible debt, such as credit card balances. Paying these balances down prior to your mortgage can make your money go further in the long run.
Mortgage Interest
Many homeowners benefit from a mortgage interest deduction on their taxes.2 Here’s how it works: the amount you pay in mortgage interest is deducted from your gross income, which reduces your federal income tax burden.3 But remember, the further along you are toward paying off your mortgage, the less interest you pay. If you are unsure whether you will be able to take advantage of this mortgage benefit, consult your financial professional.
Your monthly mortgage payment may be a large part of your available capital, especially in retirement. Eliminating unnecessary subsidies can significantly reduce the amount of cash you need to meet monthly expenses.
Depending on the length of your mortgage term and the size of your debt, you may be paying a substantial amount in interest. Paying off your mortgage early can free up money for other uses. True, you may lose the mortgage interest tax deduction, but remember as you get closer to paying off your loan: more of each monthly payment goes to principal and less to interest.4,5 In other words, the amount you can deduct from taxes decreases.
Your Legacy
Your home also has value beyond money. It is where you raised your children and made fond memories. You may want it to remain in the family. Paying off the mortgage may help make your home part of your legacy. After all, some things you just cannot put a price on.
Next Step
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1. This is a hypothetical example used for illustrative purposes only. It is not representative of any specific investment or combination of investments. Investments seeking to achieve a higher rate of return also involve higher risks. You should consider your risk tolerance before committing to any investment strategy.
2. The information in this material is not intended as tax or legal advice. It may not be used for the purpose of avoiding any federal tax penalties. Please consult legal or tax professionals for specific information regarding your individual situation.
3. IRS.gov
4. The information in this material is not intended as tax or legal advice. It may not be used for the purpose of avoiding any federal tax penalties. Please consult legal or tax professionals for specific information regarding your individual situation.
5. AARP, 2018
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The content is developed from sources believed to be providing accurate information. The information in this material is not intended as tax or legal advice. Please consult legal or tax professionals for specific information regarding your individual situation. This material was developed and produced by FMG Suite to provide information on a topic that may be of interest. FMG, LLC, is not affiliated with the named broker-dealer, state- or SEC-registered investment advisory firm. The opinions expressed and material provided are for general information, and should not be considered a solicitation for the purchase or sale of any security. Copyright 2021 FMG Suite.
Disclaimer of Liability
Our firm provides the information in this article for general guidance only, and does not constitute the provision of legal advice, tax advice, accounting services, investment advice or professional consulting of any kind. The information provided herein should not be used as a substitute for consultation with professional tax, accounting, legal or other competent advisors. Before making any decision or taking any action, you should consult a professional advisor who has been provided with all pertinent facts relevant to your particular situation. Tax articles in this blog are not intended to be used, and cannot be used by any taxpayer, for the purpose of avoiding accuracy-related penalties that may be imposed on the taxpayer. The information is provided “as is,” with no assurance or guarantee of completeness, accuracy or timeliness of the information, and without warranty of any kind, express or implied, including but not limited to warranties of performance, merchantability and fitness for a particular purpose.
3. IRS.gov
4. The information in this material is not intended as tax or legal advice. It may not be used for the purpose of avoiding any federal tax penalties. Please consult legal or tax professionals for specific information regarding your individual situation.
5. AARP, 2018
________________________________________
The content is developed from sources believed to be providing accurate information. The information in this material is not intended as tax or legal advice. Please consult legal or tax professionals for specific information regarding your individual situation. This material was developed and produced by FMG Suite to provide information on a topic that may be of interest. FMG, LLC, is not affiliated with the named broker-dealer, state- or SEC-registered investment advisory firm. The opinions expressed and material provided are for general information, and should not be considered a solicitation for the purchase or sale of any security. Copyright 2021 FMG Suite.
Disclaimer of Liability
Our firm provides the information in this article for general guidance only, and does not constitute the provision of legal advice, tax advice, accounting services, investment advice or professional consulting of any kind. The information provided herein should not be used as a substitute for consultation with professional tax, accounting, legal or other competent advisors. Before making any decision or taking any action, you should consult a professional advisor who has been provided with all pertinent facts relevant to your particular situation. Tax articles in this blog are not intended to be used, and cannot be used by any taxpayer, for the purpose of avoiding accuracy-related penalties that may be imposed on the taxpayer. The information is provided “as is,” with no assurance or guarantee of completeness, accuracy or timeliness of the information, and without warranty of any kind, express or implied, including but not limited to warranties of performance, merchantability and fitness for a particular purpose.
Our firm provides the information in this article for general guidance only, and does not constitute the provision of legal advice, tax advice, accounting services, investment advice or professional consulting of any kind. The information provided herein should not be used as a substitute for consultation with professional tax, accounting, legal or other competent advisors. Before making any decision or taking any action, you should consult a professional advisor who has been provided with all pertinent facts relevant to your particular situation. Tax articles in this blog are not intended to be used, and cannot be used by any taxpayer, for the purpose of avoiding accuracy-related penalties that may be imposed on the taxpayer. The information is provided “as is,” with no assurance or guarantee of completeness, accuracy or timeliness of the information, and without warranty of any kind, express or implied, including but not limited to warranties of performance, merchantability and fitness for a particular purpose.
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