Linda had posted an inquiry on the NewRetirement Facebook page a while back regarding what to do with a recent inheritance. Should she invest or pay off her mortgage? she enquired.
“I’m 77 years old and have a mortgage with $150,000 left on it,” the woman wrote. I have enough money from my inheritance to cover it. Must I? The interest rate on the mortgage is 4.35.
That is a valid query. Choosing wisely with money can be compared to a game of chess. Every action has both immediate and long-term effects.
Additionally, here are some ideas for different tactics from NewRetirement subscribers, although the best course of action is to use the NewRetirement Planner to model what works best for you.
Mortgage or Invest? Let’s begin with justifications for mortgage payoff
Peace of mind
The overwhelming majority of replies made the case that the peace of mind that comes with having no mortgage is far more valuable than the possibility of becoming richer. Some of those arguments are as follows:
Mike stated, “I chose to pay off the mortgage because I was in a similar circumstance. Even while the “math” might indicate that investing is preferable, becoming debt-free is a tremendous relief. If I had to do it over again, I would choose the same course of action without hesitation.
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Rosemary is happy not having a mortgage: “I love not having any debt and I don’t have a mortgage.”
“I paid off my mortgage in May of last year,” explains Cynthia.
“The most valuable thing is peace of mind,” says Cheryl. Repay the mortgage and express gratitude for your roof.
Greg states, “‘Peace of mind’ is an intangible.” Clear the debt.
Ted states, “The view from the deck is prettier and the grass feels softer when the house is paid for,” in a poetic way.
Returns in the stock market are not assured
Peter comments, “There is no guarantee that the market will go up.”
Mathematically speaking, you should invest the money, says Reed. On the other hand, you might choose to only pay off the mortgage mentally. He goes on, “I paid off my mortgage because I believe the market is close to its peak.” I like the sensation of not having to worry about a mortgage very highly.
“I agree that putting it into the market is probably too risky unless you’re certain you can stand five more years of a market correction,” says Burt, who dislikes taking chances. I advise using it to cover any necessary house repairs and to pay off the mortgage.
In order to support paying off the mortgage, Bill flips the question. Would you take out a second mortgage (home equity loan) of $150,000 to invest in the market if your house was already paid off? he asks. No, I wouldn’t.
Jim writes, “A 4.35% ‘risk-free’ rate of return is obtained by paying off the mortgage. That carries no risk at all. It would be dishonest of anyone to urge you to compare that return with the stock market return (hint: NOT risk-free). You don’t want to pay attention to that person. They are ignorant of risk.
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“Always go for the SURE thing versus a possibility of getting better returns,” suggests Ronald.
Enhanced cash flow
Jeff contends that “you will get the mortgage payment back in cash flow” when the loan is paid off. “Just remember to figure out how to use the extra cash savings,” he advises.
Julie concurs, saying, “Investing is a risk.” Being a home owner is a given. I would pay it off and feel liberated at 77. I paid mine off when I was 50, so I now have extra money to spend or put toward investments.
Some experts and brokers advise holding onto investments for the wrong reasons
Even though investing is probably a better financial decision than paying off your mortgage, a lot of people brought up the fact that financial counsellors have a stake in your success.
An advisor you use will profit from your investments. If you pay off the mortgage, they lose money.
“Paying off the house solves the stress of questioning whether your financial advisor—who probably earns 1% or more from the assets he manages—is providing advice that benefits him rather than you,” adds Peter.
The reasons in favour of investment come next
Accumulating wealth
Putting aside the motivations of advisors, investing increases your wealth by 4% compared to paying off your mortgage if you are paying 4% interest and can achieve an 8% return on your investments.
A lot of people brought up how easy the math is.
Adaptability
John writes, “Paying off the mortgage makes the money inaccessible (unless you sell or get a new or reverse mortgage). It is not necessarily about the rate of return. Think about your cash flow and when you might need or want to spend the money.”
The inflation rate
If inflation stays high, there is good reason to maintain debt.
Derrick explains, “In an inflationary market, those with low interest loans may see their loans become essentially interest free, if the inflation rate is higher than the interest rate. And, if you get to itemize and write-off your mortgage interest as well, this is a no-brainer.”
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Invest in happiness
Stacy had a very popular response, “I’m a nurse so my perspective may be different. I see people at the end of their lives and it has enlightened me to a few things. You never know when you will be gone, so does having the cash handy give you more security or more ability to do what makes you happy?
Divide the disparity
Mark suggests a compromise, “How about splitting it up? Pay $75k towards the mortgage and invest the other $75k. Yes, if the market corrects, some of that will go down.
Choose light of your long-term care objectives
A few people noted Linda’s age and suggested that she consider deciding on light of her long-term care goals.
She could invest the money and use the principal and returns to fund care if she needs it. Or, she could pay off the mortgage and then get a reverse mortgage or sell the home to fund care.
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Make a choice depending on your objectives
Jeffrey thinks that the decision should be based on personal goals and suggests a good framework for making a personalized decision:
“If you are 1) comfortable with your lifestyle at your current cash flow with the mortgage payment, 2) if you have a purpose for the money, like travel, or 3) if you aren’t worried about inheritance, then forget the mortgage and investments, have some fun with the money.
“However, if you are worried about living a long time and potentially running out of money, invest it. Or, if paying off the house would make you feel better, then do that.”
Based on actual estimates, make a decision
As Dan says, “This is an unanswerable question without knowing your full retirement planning details and goals.”
There are not any right answers, only what is right for you.
