Managing your financial life is not just about money.

A Financial Advisor’s Thoughts on Real Estate: Should you pay off your mortgage?

By Alyssa McNamara Reed, CFP®


Buying and selling real estate is obviously a huge financial decision for people, and thus, I have conversations on the topic many times throughout the course of my work week.  A home is certainly an investment, and for many people, the largest investment that they have.

Having said that, I don’t think a home should be thought of primarily as an investment.  It’s a HOME.   It should be where you want to LIVE.  It is where you will spend the foreseeable future.  It may be where you raise your family.  It may be where you want to enjoy your retirement.  It’s not a mutual fund/stock/bond that is purchased for its earning potential alone.   The first question you should ask yourself when buying a home (not including income property) should be “Is this where I want to live?” not “will this property earn me ____% per year?”  Yes, re-sale value is important, and of course I’m not saying you should buy a property that will depreciate over time.  Real estate is like many other investments: if held long enough (and maintained), it will most likely appreciate in value.

While we are on the topic of real estate, one of the top 10 questions I get is “should I keep my mortgage [even if I could pay it off] because it is a good tax deduction?”  The short answer is “No,” but allow me to explain.  Let’s take for example a mortgage with a balance of $100,000 and an interest rate of 5%.  This mortgage costs you $5,000 in interest over the course of 1 year (5% of $100,000).  If you itemize your deductions, your taxable income in that year will be reduced by $5,000 due to the mortgage interest.  This is not a dollar for dollar tax savings, it simply reduces your taxable income.  If you are in the 25% tax bracket, you are saving 25% of $5,000, which is $1,250, as a result of carrying the mortgage.  So… you paid the bank $5,000 in interest and you saved $1,250 in taxes.  You were still out of pocket $3,750 because you had the mortgage.

If you can pay off a mortgage without jeopardizing your retirement, without paying unnecessary taxes (to withdraw the funds from an IRA, for example), and without depleting your cash, I say go for it.  It’s certainly not worth holding onto just for tax reasons.

Leave a Reply