Should I Pay Off My Mortgage?

Our house in Omaha finally sold.Now that our two-house ordeal is over, what should we do with money? We had paid off the mortgage on the Omaha house many years ago. The proceeds are large enough to pay off the mortgage on our new home. Should we? Or should we invest it and profit from the difference in returns from the investment and the mortgage? Let’s look at the options my wife and I are facing.Option 1 – Invest the money in low-risk investments and use the interest to pay the mortgage.This could work for us. The yield on short-term government debt is higher than our mortgage rate. Unfortunately, the gap isn’t that wide. We could make enough for me to eat an extra Mama’s Pancake Breakfast at the Cracker Barrell each month (the one I had today while outlining this article was fantastic). But the strategy isn’t likely to pay off for long. The Federal Reserve has indicated it will likely cut rates next year. When they do, our mortgage rate will be above the yield of short-term government debt.

The process also adds complexity to our finances. Our taxes are more complex. So is our budget. And each month, we must decide how much we pay on the mortgage. If we had a 3% mortgage, we’d likely pursue it, but the gap must be large enough to pay us for the extra work.Option 2 – Invest the money in higher-risk investments and use earnings and income to service the mortgage.The interest on the mortgage is tax deductible. Rather than paying off the mortgage, why not invest in a tax-efficient stock portfolio that has gained around 10% annually? It doesn’t have to be the stock market. A new 30-year mortgage yields 7.3%, more than 2% higher than our mortgage. That gap can buy a lot of pancakes.

Chasing after this kind of gain elevates the importance of wealth to too high of a level. Are the added profits going to allow us to take hold of life that is truly life? (1 Timothy 6:19b)

It also comes with some stress. I once met an investor who borrowed money for his mortgage in Japan because the rates were close to zero, and he saved a lot. He also had the risk that the Yen would spike against the U.S. dollar and, in my case, have to explain it to my wife (the real risk).Chasing after this kind of gain elevates the importance of wealth to too high of a level. Are the added profits going to allow us to take hold of life that is truly life? (1 Timothy 6:19b) What if life’s challenges create a need for cash while the market is low? Pursuing very good but not excellent financial management favors simplicity and flexibility, not risk-taking at the expense of prudence.

Very good financial management emphasizes solid choices that allow people to thrive financially while putting their energy toward other areas of life.

Option 3 – Pay off the mortgage.This is what we chose to do. Very good financial management emphasizes solid choices that allow people to thrive financially while putting their energy toward other areas of life. While we lose the tax deduction on mortgage interest, we can give the amount we paid in interest to charity and end up at about the same spot. The amount that went to principal can be allocated to a Roth retirement account, where the gains are higher, and the tax advantages are potentially even more significant. If life’s challenges require extra cash, we have more margin because the mortgage payment is gone. It may not be excellent, but we’ll do just fine.As I discussed in my January article, pursuing financial excellence isn’t the goal. Being excellent at financial management takes too much time for the benefit. It also raises money to far too high a level of importance. This article evaluates our options from this perspective. 

Scott Kubie, CFAPresidentFor more practical advice on finances, read the articles and explore the resources at faithandfinance.org.