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Should You Carry a Long-Term Mortgage?

Drew Tignanelli
Drew Tignanelli
It’s not uncommon to consider paying off your mortgage when you get close to retirement or come into a large sum of cash. It’s also not uncommon for many financial advisors to recommend maintaining or even taking out a mortgage when the topic arises. Regardless of whether that advice is good or bad, it presents a conflict of interest, because maintaining a mortgage provides more funds that the advisor can generate more commissions or fees from. So how do you decide whether to keep a mortgage on your home? The answer to this question comes down to two separate questions: Do you want to accept more risk in exchange for a potentially higher return, or do you want the peace and contentment associated with being debt free?
The cash that you retain from either not paying off a mortgage or that you receive from a new long-term fixed rate mortgage (especially in an inflationary environment) can create income and growth. Consider what must happen to make this strategy successful: The house has to hold its value—or even better—appreciate in value. The proceeds from the mortgage must be invested, and the after-tax rate of return on these proceeds must outpace the tax adjusted cost of the mortgage.  

The calculation of these scenarios is complicated but as an example, if my mortgage is at a 4% interest rate, and I am in the 25% tax bracket, if I take an itemized tax deduction I need more than a 3.75% after-tax rate of return on my investment to make my mortgage worthwhile (some assumptions made). A higher rate of inflation can also improve the case for holding a mortgage because inflation is reducing the value of money you use to pay the loan back with. It also increases the required rate of return you need to earn but in general many asset values will increase in line with inflation.

All of this said, there is something about the human psyche that longs to be debt-free. An old saying goes, the borrower is the slave of the lender. We truly sense freedom when we become debt-free. No matter how rich or how poor one might be, there is a sense of freedom in being debt-free. It is said that both Warren Buffet and Bill Gates have no personal debt. The peace and contentment of having no debt is 100% guaranteed.   

If you’re considering using a mortgage to keep money invested or invest new money in the market and the simplified example given above seems confusing, it is. This is a complex topic that should start with an assessment of your risk tolerance, your goals, and your ability to achieve those goals with your current plan. Your best bet is to talk to a Certified Financial Planner™ who is fee-only and who will properly disclose conflicts of interest, like the one we discussed here.

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