I Paid Off My Mortgage

COMMONSENSE MAY/JUNE 2017

AAEM NEWS

Dollars & Sense

I Paid Off My Mortgage — Should You?

Joel M. Schofer, MD MBA CPE FAAEM

Commander, U.S. Navy Medical Corps

I cut a check and paid o my mortgage in

February, making me debt-free. It cut my living

expenses by about a third and ensured that in

four years, at the age of 45, I'll be ﬁnancially

independent and eligible for military retirement.

What a glorious feeling! Should you pay o your

mortgage as soon as you can?

Beneﬁts of Paying Off Your Mortgage

You have one less thing to worry about! You've got food. You've got

water. Now you've locked in your shelter and may be debt-free on top of

that. You can move from “safety” to “love and belonging” on Maslow's

hierarchy of needs.

It reduces your ﬁxed monthly

expenses, which goes a long

way toward setting you up

for retirement, fewer shifts,

or even an alternative career

path. Housing is usually a

large percentage of your

monthly expenses, and

everyone who decides to

purchase their primary domi-

cile should make being mort-

gage-free a primary goal by

the time of retirement.

It saves you money, since

you'll likely save tens of

thousands of dollars in in-

terest you otherwise would

have paid. In addition, if you no longer have a mortgage you should

be able to reduce the amount of life and disability insurance you are

paying for each month.

Without a mortgage, you can save and invest more money every month.

Before I paid o my mortgage, I saved 30% of my gross income. I'm not

sure how much I'll save now, but it'll be more than 30%.

When you pay o your mortgage, you are getting a guaranteed rate

of return on the investment. In my case, the rate on my mortgage was

3%. I'm usually in the 33% tax bracket, which means that every dollar I

put toward paying o my mortgage earned me a guaranteed return of

2%. This is a remarkably similar return when compared to most low-

risk bond yields in recent years. In fact, this is exactly why I paid o my

mortgage. I wanted to have a small portion of my retirement savings

in bonds, but it made no sense to own bonds that would pay me 3-4%

while paying 3% on my mortgage. Paying down your mortgage is a rea-

sonable substitute for buying bonds.

There can be asset protection beneﬁts to paying o your home loan.

Some states provide unlimited asset protection for home equity, which

makes it nearly impossible to lose your home if a lawsuit doesn't go

your way. Other states, however, protect very little of your home equity.

If you want to see what your state protects, go to this link and look for

each state's “homestead exemption”:

www.assetprotectionbook.com/forum/viewtopic.php?f=142&t=1566.

If you are paying a ﬁnancial advisor who charges you a fee based on a

percentage of your assets under management, by taking some of those

assets and using them to pay o your house, you reduce your invest-

ment expenses.

Beneﬁts to Keeping Your

Mortgage

When you make your mort-

gage payment, some of it

goes toward principle and

increases the equity in your

home. For me this was about

$2,000/month of forced

savings. If you are not ﬁ-

nancially disciplined, making

a mortgage payment will

ensure that every month you

are squirreling away at least

a little bit of money.

Mortgage rates are still

near their all-time lows. If

you can borrow money at

3-4% and invest it in some-

thing that will give you a higher net return, it makes sense to invest

the money instead of paying o the mortgage. That said, you have to

make sure that you actually invest the money. In addition, there are very

few investments that guarantee a return greater than your mortgage.

Actually, there probably aren't any, because of the word “guarantee.”

Yes — stocks, high-yield or corporate bonds, real estate, etc., will prob-

ably make more than 3-4%, and you can protect yourself by diversifying

— but that is certainly not guaranteed.

The after-tax mortgage rate you are paying may be below inﬂation.

For example, my after-tax mortgage rate was 2%. If inﬂation had been

above 2%, I would have been getting paid (in real terms) to borrow

money! The value of real estate tends to rise with inﬂation but your

mortgage payment is ﬁxed, so when inﬂation increases the value of

your house but your mortgage payment remains the same, you are

paying the loan back with dollars that are worth less and less as time

goes on. When your mortgage is paid o, you give up this beneﬁt.

Continued on next page

MAY/JUNE 2017 COMMONSENSE

AAEM NEWS

What Should You Do?

Like most ﬁnancial decisions, situations vary and this decision can

be complicated. The best online article I could ﬁnd that goes through

all the complexities of the issue, which my brief article does not,

can be found here: https://ﬁnancialmentor.com/ﬁnancial-advice/

pay-o-mortgage-early-or-invest/7478.

You should always maximize contributions to your retirement accounts,

pay o all non-mortgage debt that has a higher interest rate, and save

for your children's education before you consider paying your mortgage

o early. But if you ﬁnd yourself having taken care of all of this, and

weighing investing in bonds versus paying o your mortgage, you can't

beat the peace of mind that comes with being mortgage-free!

If you have ideas for future columns or have other resources you'd like

to share, email me at [email protected].

The views expressed in this article are those of the author and do not

necessarily reﬂect the ocial policy or position of the Department of

the Navy, Department of Defense or the United States Government. ■

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