The allure of a mortgage-free life can be tempting, but before diving into your retirement savings and investments to pay off your home loan, remember that’s not always the best financial option.
While eliminating mortgage debt saves interest expense and reduces stress, it often comes at a significant “opportunity cost”, which is the cost of going with one decision over another. You should consider what the funds used to pay off your mortgage could have otherwise accomplished.
Dipping into retirement savings means missing out on potential gains. Your anticipated rate of return on your investments is likely greater than the interest rate on your mortgage. Considering the historical average rate of return of an S&P 500 index fund is close to 10%1, you could miss out on a 10% annual compound gain in exchange for saving interest expense equal to your mortgage rate. That’s a serious opportunity cost! There are also potential tax benefits that you could miss by paying off your mortgage if you itemize your deductions.
There is no one-size-fits-all approach. Financial advisors like those at Hendricks Wealth and Estate Management can provide guidance that balances debt reduction with proper investment management, which can ultimately help you smile through your retirement years, not sigh.
The best financial decisions are informed ones. Don't let the pressure of a mortgage cloud your judgment. By carefully weighing the pros and cons and with the right advice, you can make the best decision.
Hendricks Wealth & Estate Management will be speaking about this topic during our “Don’t Do Dumb” Webinar on January 24, 2024 starting at 5:30pm CST. To reserve your spot or learn about future “Don’t Do Dumb” sessions, visit www.jghfs.com/events.
1 Speights, Keith, S&P 500 Index Fund Average Annual Return Rate, The Motley Fool, 12/14/2023, https://www.fool.com/investing/how-to-invest/index-funds/average-return/