Ask an advisor: Should I pay off the rest of my mortgage in one lump sum?

Ask an advisor: Should I finish my mortgage right now?

October 25, 2023 6:28 PM

Homeownership is seen by many Americans as a path to building personal wealth.

Welcome back to "Ask an Advisor," the advice column where real financial professionals answer questions from real people. The topic can be anything in the world of finance, from retirement to taxes to wealth management — or even advice on advising.

Owning a home is part of the American dream. According to the U.S. Census, 65.9% of U.S. adults own a home, as of this year's second quarter. And that's in spite of historically high interest rates. As of this month, the average rate for a 30-year fixed-rate mortgage is 7.63%, according to Freddie Mac — the highest it's been in two decades.

Nevertheless, Americans think homeownership is worth the price. Twenty-three percent of respondents to a CNBC survey said buying real estate was the best way to increase their personal wealth, more than any other financial decision.

So when the end of a decades-long mortgage comes within reach, it's tempting to pay the rest off in one lump sum. But is that the best financial decision? Experts say there are many factors to consider — especially in terms of what that money could do if it weren't going into the house.

One couple in New Jersey is facing this exact dilemma. Here's what they wrote:

Dear advisors,

My husband and I have a chance to pay off the rest of our mortgage right now. Should we take it?

We're both 64 and looking to retire in the next few years. We bought our house in Passaic County, New Jersey, in 1998. The price was $240,000, and we refinanced twice. Now we have $48,000 left to go.

Thankfully, we have enough savings to cover that amount right now. So we have two choices: Pay off the rest of our mortgage over 12 years, at our interest rate of 4.25%, or get it all over with right now.

What should we do? We plan to live in this house for our retirement, so it would be wonderful to own it outright. But are there any tax issues or other consequences to paying such a large sum?

Thank you so much for your help,

Pondering in Passaic

And here's what financial advisors wrote back:

Don't do it!

Robert Persichitte, certified financial planner and founder of

DeLAGify Financial

in Arvada, Colorado

For the love of all things accounting, don't pay off that low-interest mortgage!

You have to consider your next best option with that cash. If your mortgage interest rate is lower than long-term treasuries (which it is), you will have more money in your pocket if you take the long-term investment. Barring some strange tax or debt covenant situation, you could be better off with an extraordinarily safe investment, like government bonds, than paying off your mortgage. I'm not saying that bonds are the best place for this money, but they are objectively better than paying off the mortgage as of October 2023.

Go for it!

Freddy Garza, CFP and partner at

Endeavor Advisors

in Houston, Texas

Dear Pondering, there is nothing sweeter than being able to pay off your mortgage and live in your own home completely debt-free. Although your current 4.25% mortgage rate is slightly lower than you could get on your $48,000 if you invested it elsewhere, the security and peace of mind is well worth the trade-off in my opinion.

Since you would no longer have a mortgage payment, you could begin to rebuild your cash savings, which can be invested in money markets or a taxable brokerage account. You will be able to build savings much faster, since you will no longer have a mortgage payment. If you are currently escrowing, you will be responsible for paying your homeowner's insurance and property taxes directly, since your mortgage lender will no longer be able to do it. So make sure you are putting aside enough to cover those expenses on a monthly basis.

On the other hand, the remainder of your current mortgage payment can be saved or invested. Congratulations on this wonderful accomplishment!

Consider the alternatives

Megan Kopka, CFP and CEO of

Kopka Financial

in Wilmington, North Carolina

First of all, there's always a chance — it is rare, but some mortgages have a penalty for paying off early. Call and ask.

I would not repay a balance when the interest rate is 4.25%. You are borrowing money relatively cheaply, and the payment is predictable. It is likely you could do better in the market and profit, even investing conservatively. For example, the 10-year treasury is slightly higher — 4.96%.

Some people like living debt-free. However, a couple of years from retirement, holding more liquid cash is better. It is prudent to buffer your annual needs and have cash-like equivalents to wait from trading in market lows. Also, emergency costs like health care are higher as we age.

My advice is to keep the predictable, monthly mortgage payment and hang onto the cash.

Two ways to look at it

Kevin Brady, CFP and vice president of

Wealthspire Advisors

in New York City

There are two main points of view to consider: mathematical and psychological. Neither one is necessarily "correct," because what is the right path for one person is not necessarily the right path for someone else.

Mathematically, you could view paying down the $48,000 remaining balance on the mortgage as guaranteeing a 4.25% return, since that's the interest rate on the loan. That is a respectable return. However, in this higher interest rate environment, you can get 5%+ returns within Treasury bills and money market funds and get pretty close to 5% in high-interest online savings accounts.

Put differently, at least for now, you can achieve that same economic return and still retain the flexibility of having that $48,000 available to you. If you use that cash to pay the rest of the mortgage, the only way to access it is to either sell the home or access the equity through some sort of refinance loan, at a much higher interest rate than 4.25%.

Psychologically, though, there is something to be said about being debt-free. Many put a high value on leaving no debt to the next generation and being able to pass on a meaningful inheritance. If this describes you and keeping the debt outstanding makes sleeping at night harder, paying the mortgage off can be a reasonable action.