There was a time when mortgage-burning parties were common. It was like putting the cherry on top of the American Dream. And this burning thing was not figurative.
Once that last house payment was made, the mortgage company would send the mortgage agreement to the borrower stamped “paid in full.” This would be such a cause for celebration that the new homeowners would invite everyone over to watch them set the document on fire, all the while cheering as it went up in smoke.
Things have changed, especially in recent years as mortgage rates have dropped so low. Some financial advisors actually advise their clients to not pay off their mortgage and instead invest the money to build greater wealth. Of course, this action provides a healthy income for the advisor, who collects commissions when a client takes that advice.
You may be tempted to follow that advice — refinancing and stringing out your mortgage for as long as possible — even into your retirement years, while you try to get a higher return on your investments.
Before you decide to stick with minimum payments, consider the following benefits of having no mortgage payments by the time you reach retirement.
GUARANTEED HIGH-YIELD INVESTMENT. Investing in your debt pays you a guaranteed rate of interest equal to the amount of the interest you were paying on that debt. Here’s how that works:
If your mortgage is subject to 5 percent interest, every dollar of principal you pay off is a dollar you won’t have to pay interest on in the future. You get to keep the 5 percent interest you would have paid. That’s your return for investing in your debt.
PEACE OF MIND. Once you eliminate your mortgage, you have just eliminated your biggest monthly bill. You are able to live rent-free, so to speak. You also don’t need to agonize about whether your investments are outperforming the interest you are paying on that mortgage.
Without a mortgage, you have the option to invest. You gain complete control over where you live. You can downsize or move as soon as you feel it’s best, or choose to stay in your home for the rest of your life.
SAFETY NET OF LAST RESORT. A home that’s fully paid for gives you another option that you should guard jealously: a reverse mortgage.
Having access to the equity in your home without having to leave your home or even make monthly payments could be the difference between a joyful and peaceful end of life, and a season of misery for both you and your family members. It may not, however, be as simple and glamorous as the late-night TV celebrity pitchmen make it sound.
A reverse mortgage, while often advisable, can be very expensive. The fees and high rates of interest often escape the attention of seniors. The numbers can be staggering. This is why you want to make sure you keep that option as your safety net or your last resort, not a means to get a pile cash the day you turn 62.
Just keep in mind that to get a reverse mortgage you cannot have an existing mortgage. Besides being able to send out those party invitations, this is yet another reason you need to get busy paying off your mortgage.
Anyone got a match?
Mary invites questions, comments and tips at firstname.lastname@example.org, or c/o Everyday Cheapskate, 12340 Seal Beach Blvd., Suite B-416, Seal Beach, CA 90740. This column will answer questions of general interest, but letters cannot be answered individually. Mary Hunt is the founder of www.DebtProofLiving.com, a personal finance member website and the author of “Debt-Proof Living,” released in 2014. To find out more about Mary and read her past columns, please visit the Creators Syndicate Web page at www.creators.com.