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A Case Study: To Pay Off Your Mortgage? Or Not?

Estate Planning Investment Planning Tax Planning Retirement Planning

We had a new widow many years ago who was sure she wanted to take her husband’s life insurance settlement and pay off her house.

As planners, we were concerned with setting up her finances, establishing an emergency fund and getting her ready for retirement in the next 5 years.

When we talked with her about the mortgage payoff, we found out that it was the fear of losing the house in the future that drove her request.  She was afraid she would not be able to afford the house payment in retirement.

Yes, we all know the rules about paying off a mortgage: if she had a low interest rate mortgage she could take the extra cash and earn more in the market. At the time she still received a tax break for having mortgage interest.  She wouldn’t want to be house rich and cash poor, and a mortgage is a hedge against inflation.

But those arguments were not going to solve her fears so we settled on a compromise --  one that we have used often since then.

We set aside the amount of money needed to pay off the mortgage and used it to establish a municipal bond ladder, which at the time earned about 4.5%. She could see the money sitting in the account in bonds, available to pay off her mortgage at any time she felt unsafe.

We asked once a year to see if she had changed her mind about paying off the mortgage, but she never did. The mortgage is paid off now. She is retired, and there are still remnants of the bond ladder in her retirement portfolio. Even better, she tells her friends how we solved her problem and made her feel safe.

If you find yourself wondering what life looks like with or without a mortgage, just know that you’re not alone.  Even if you’d DIY’d your finances your whole life, certain life changes present unique challenges that you’re probably facing for the first time.  And if that’s the case, schedule a consultation with us now.  We’d be more than happy to see how we might be able to serve you. 

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