Ex­perts weigh in on whether to pay off your mort­gage early

Baltimore Sun Sunday - - HOME SALES - By Deborah Kearns

Pay­ing off a mort­gage is a huge ac­com­plish­ment, and it’s a cor­ner­stone of fi­nan­cial in­de­pen­dence. Home­own­ers who don’t want the shadow of a mort­gage pay­ment hang­ing over them for decades are ea­ger to map out a strat­egy for tackling their mort­gage debt for good. But other home­own­ers might be bet­ter served put­ting their cash to use else­where, such as high­er­re­turn in­vest­ments or re­tire­ment sav­ings.

Three fi­nan­cial ex­perts weigh in on the ever-evolv­ing de­bate on whether you should pay off your mort­gage early — or put your money to work in other places. Let’s dive in.

Ev­ery­one agrees: Tackle mort­gage debt last. Be­fore you even think about pay­ing off your mort­gage early, fi­nan­cial ad­vis­ers say you should get rid of high-in­ter­est debt, stu­dent loans and other siz­able debt. Two other key ar­eas that many peo­ple short­change or ne­glect are their re­tire­ment and emer­gency sav­ings.

A re­cent Bankrate study shows that nearly half of work­ing adults (48%) are sav­ing some­thing, but no more than 10% of their an­nual incomes. Only 1 in 6 em­ploy­ees (16%) say they’re sav­ing more than 15% of their yearly earn­ings.

Eval­u­at­ing how best to put your money to work: Pour­ing money into a house that you don’t plan on liv­ing in for more than five or 10 years ties up a good chunk of your liq­uid­ity for the fore­see­able fu­ture. That prob­a­bly won’t be in your best in­ter­est, es­pe­cially if your mort­gage car­ries a low in­ter­est rate, says Helen Ngo, CFP, founder and CEO of Cap­i­tal Bench­mark Part­ners in Atlanta.

“Look at where else you can put your money so that it works for you,” Ngo says. “Your in­ter­est rate plays a fac­tor in the de­ci­sion, and you have to weigh the spread in rates.”

For ex­am­ple, a 30-year mort­gage with a 4.5% rate is still su­per cheap com­pared with the 8% to 9% that peo­ple paid in the 1990s, Ngo says.

Dou­glas Boneparth, pres­i­dent of Bona Fide Wealth Man­age­ment in New York City, points out that if you have a mort­gage rate near 4%, but you can get a 6% to 7% re­turn on a di­ver­si­fied in­vest­ment port­fo­lio, pay­ing off your mort­gage early won’t make sense on pa­per.

“The spread be­tween your mort­gage in­ter­est rate and what you can con­ser­va­tively as­sume by in­vest­ing your money might in­flu­ence how you al­lo­cate your sav­ings across any large debt,” Boneparth says.

How emo­tional bag­gage of debt fac­tors in: Debt is a heavy topic. Peo­ple feel de­fined by it, and that comes with con­sid­er­able emo­tional bag­gage. Their feel­ings about debt — even car­ry­ing a mort­gage long term — can over­ride any fi­nan­cial con­sid­er­a­tions of put­ting their money to work else­where.

“It’s eas­ier to think, ‘Hey, I’m debt-free’ in­stead of how to di­ver­sify an in­vest­ment strat­egy,” Boneparth says. “But you have a choice to make. Peo­ple are shoot­ing from the hip in­stead of crunch­ing the num­bers.”

Your age and ap­petite for risk mat­ter too.

The younger you are and the more money you earn, the more you can afford to be ag­gres­sive with in­vest­ment risk. But that ap­petite for risk dwin­dles as you get closer to re­tire­ment age, says Richard Baren­blatt, a mort­gage spe­cial­ist with GuardHill Fi­nan­cial Cor­po­ra­tion in New York City.

“There are sit­u­a­tions where not hav­ing mort­gage is good,” Baren­blatt says. He adds that knock­ing out your mort­gage ahead of sched­ule makes sense if you’re re­tired or you don’t need the tax ben­e­fits, which are less ro­bust un­der the new tax law.

“Be­ing debt-free is the holy grail of fi­nan­cial security, and that’s ul­ti­mately what a re­tiree is work­ing to­ward,” Baren­blatt says, adding that as peo­ple age, they’re more afraid of run­ning into fi­nan­cial trou­ble that could take the roof from over their heads. “It’s a com­mon per­cep­tion as peo­ple get older, and that over­rides any other lu­cra­tive (money-mak­ing) op­por­tu­ni­ties that come their way.”

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