Should I Pay Off My Mortgage? Part 1

Financial advisors disagree

Many people think that the Holy Grail of financial fitness is to be debt free as soon as possible. They’ve paid off all their credit card debt (bravo!), and they buy new cars with cash (excellent idea!). The last thing to go is the mortgage. They have some extra cash from an inheritance or another windfall and are tempted to just pay the thing off and be done with debt forever. But is this the best use of extra cash?

Financial advisors disagree. While it’s difficult to give the best advice without knowing your personal financial profile, temperament, and goals, I’d like you to consider the following hypothetical scenario.

Jim and Sue are both 56, empty nesters, happily and gratefully employed, and living in the house of their dreams. To the extent that they can project, they intend to live in this house for the next 20 years and then move to a condo or, if necessary, a retirement community that offers a continuum of care. They assume they’ll both retire in 10 years, when they are 66 and can get full Social Security benefits.

Their home’s fair market value is $450,000. They still owe $200,000 on a 7% 30-year fixed rate mortgage, to be paid off fully in 10 years, remarkably coinciding with the onset of their retirement. Just as remarkably, Sue recently received an inheritance of exactly $200,000 from the estate of her beloved aunt, may she rest in peace.

They come to me, their personal financial planner, and ask if they should pay off this last debt and have a mortgage-burning party with champagne, fine chocolate, and roses. My quick review of their financial health reveals the following:

• Their cash flow is more than adequate to finance their lifestyle.
• They already save 10% or more of their income, and they invest it in a tax-efficient way.
• They have an adequate cash cushion for emergencies.
• Their asset allocation (the mix of stocks, bonds, and cash) is optimal for their life goals.
• They have sufficient insurance coverage for whatever mishaps may occur.

The $200,000 inheritance is not needed to correct any financial blunders, so what is the best use of this money? Find out next week.


By Deborah Hoskins, JD, CFP
The Wise and the Wary Blog