Should You Pay Off Your Mortgage? The Answer May Surprise You

The following article from the WSJ reveals that it may make sense for you to pay off your mortgage. Here's one reason why: With today's volatile stock market, you can't necessarily guarantee that any funds you have invested will outperform the interest rate you're paying on your mortgage.

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Should I Pay off the Mortgage?

By June Fletcher
WSJ, Oct. 5th 2010

Q: We have a mortgage worth $177,000 on a house that we've owned for 21 years. We've refinanced our loan twice, and now have a 30-year mortgage at 6.48% that we took out in 2002.

My husband and I are now six years from retirement, and we are trying to figure out the best use of our money. We have enough to pay off the mortgage without dipping into our IRAs, and we'd sleep better if we didn't have a mortgage hanging over our heads. Is this a good idea?

—Washington, D.C.

Given the economy's continuing weakness, the fact that you have cash that's not tied up in IRAs and how close you both are to retirement, I think it's a fine idea to pay off your mortgage.

Here's why: You should always try to get the best return possible on your money. So you shouldn't keep the loan unless you can find another investment that, before taxes, can reliably earn more than the 6.48% that you're currently paying on it. With the stock market still volatile and certificates of deposit and other relatively safe investments paying less than the rate of inflation, I wouldn't count on that.

What's more, paying off a mortgage loan is risk-free—no matter what happens to the general economy, you'll be left with an asset that you can live in or rent out.

A downside is that you'll lose the mortgage interest tax deduction if you pay off your loan. But as a new report from the National Association of Home Builders points out, those benefits largely go to those buyers who are younger than 45, who typically have the largest mortgages and the most itemized expenses.

Meanwhile, if you pay off the loan, you'll have plenty of company. According to the latest American Community Survey released by the U.S. Census, there are approximately 50.7 million owner-occupied homes with a mortgage in 2009, compared to about 51.6 million in 2008. Folks are paying off second mortgages and home equity lines of credit, too. Those have dropped to about 12.1 million in 2009 from roughly 13.3 million the year before.

Of course, you do have other options. You can refinance your relatively expensive current loan to today's lower interest rates—but doing so will incur thousands of dollars in closing costs. Or, while you are both still working, you could simply add extra principal payments to your current mortgage and pay it off more quickly.

But if you pay off your mortgage completely, you'll not only sleep soundly, you'll be in a position to get a reverse mortgage should you need to tap into your home's equity at a later date. The way reverse mortgages are structured, the older you are when you take out a reverse mortgage, the more you'll be able to withdraw while still remaining in your home, since your life expectancy declines with each passing year. That's a good fallback should you outlive the funds you manage to put away before retirement.