Managing Your Mortgage for Financial Independence

by | Dec 13, 2010 | Cash Flow, Weekly Column

One of the keys to financial independence is affordable housing, whether you choose to buy a house or rent. However, if you have a mortgage, Iin many cases, you can increase your net worth or gain valuable financial breathing room by paying off or refinancing your mortgage. But although you may find the financial freedom a paid-off mortgage will provide attractive, it may not always be the best choice. Some people may prefer gaining financial freedom through investing in the stock market or in rental properties to obtain sources of passive income, and leave worrying about paying of their mortgage for the long term. Here are some points to consider before deciding to do either one.

Paying Off the Mortgage

If you’re younger than 40, funding your retirement probably comes first. Put your investment dollars into 401(k) plans and IRAs before you start paying off your house.

The mortgage interest tax deduction is an emotional rather than a financial reason to keep a house payment. The deduction is only a percentage of the total you pay out, so its relatively small benefit is far outweighed by the larger benefit of not having a payment.

For homeowners over 50, focus on paying off the mortgage. In some cases, it might even make sense to do so by taking money out of your investment portfolio. If, for example, part of your portfolio is in a money market account earning around 1%, and you’re paying 5% on your mortgage, it’s a no-brainer to pay off the mortgage. Then you can make monthly “mortgage” payment back into your investments.

It’s usually not a good idea to pay off the mortgage by taking money out of a 401k or IRA, unless you are over age 59.5, are in a very low tax bracket, and have a low mortgage balance. Otherwise, you may be better off to keep the mortgage rather than pay the taxes and penalties on the withdrawal.

I am biased toward having a paid-for home at retirement, because it allows you to live more comfortably on a smaller income. However, this is an individual decision that really comes down to how you will sleep at night. For many retirees, the increased cash flow and security of living in a paid-off house are worthwhile. Others may prefer to make house payments and leave their investment funds untouched.


Refinancing your house at a lower interest rate won’t automatically save money. There’s always a cost to refinancing. Compare the total remaining interest you will pay on the current loan with the total interest you will pay on the new loan, plus the closing costs. Comparison shop among at least three lenders to get the best interest rates and lowest refinancing costs.

If you have a short-term mortgage, so much of your payment is already going to principal that refinancing probably doesn’t make sense. The same is true if you have less than about five years left to pay. If you plan to sell the house soon, you need to compare the interest savings and associated refinancing costs for the years until you expect to sell rather than for the remaining life of the loan.

Know your reason for refinancing. Is it to save money on interest or to lower your payments? If refinancing extends the loan period, you could end up paying more total interest even with a lower rate. That might be a good choice if you’re having trouble making payments and the longer term could help you stay in the house.

If you can refinance for a longer term at little or no increase in the total cost, then go for the longer term. The lower payment gives you more flexibility in case of a job loss or other crisis, and you can always choose to prepay to save money.

Make Your Own Best Choice

There is no hard and fast rule about when it’s best to pay off or refinance your mortgage. The bottom line is to make the choice that will help you live more comfortably, both emotionally and financially, in your own home.

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