Reasons Not To Pay Off Mortgage?
There are two main reasons people cite when arguing against paying off one’s mortgage. They are:
- You can invest the money at a higher rate of return than what you’re paying in terms of your mortgage rate.
- Lose mortgage interest deduction
Let’s look at each briefly.
Investing the money at a higher rate of return is always assumed and isn’t really thought through much. First, one should adjust their rate of return based upon the risk associated with it. Clearly, the risk is much higher in investing versus paying off the mortgage debt.
Secondly, usually people don’t factor in taxes into the equation. You are taxed on the gains on your investments.
The ultimate indicator? Asking someone if they would borrow money to invest in stocks if their house was paid off. The answer would almost always be definitely not.
On the mortgage tax deduction, you’re paying interest in order to save some money on taxes. Say you spend $10k on mortgage taxes this year and save $2500 in taxes because of it. You’re still losing $7500 in the equation. If you’re set on losing money and deducting taxes, why not give that $10k to a good charity? You’ll save/lose the same amount.
I’m a firm believer in paying off a mortgage. The only thing that holds me back from a big time aggressive payoff is the prospect of inflation. If you hedge yourself for inflation, pay off the mortgage at will.