Consider Alternatives Before Paying Off Your Mortgage

Robert B. Withers, President, Mortgage1.com/Withers & Company, New Rochelle, NY

For many, the American Dream means owning a home free and clear -- that is, without any mortgage payment.  However, for some this means paying off the mortgage and ending up in a ‘no cash’ position. For others it means trading in one debt for another, perhaps on a credit card – at a substantial cost.

I often recommend that homeowners consider keeping their mortgages for two primary reasons: liquidity and the tax advantage.

If you’re like most people, you simply can’t afford to buy everything with cash. Therefore, you should consider how to best use the credit you have. For homeowners that often means borrowing against the equity in the home since the interest will be tax deductible.

When a customer asks me if it would be appropriate for them to pay off their mortgage, I normally let them know that it will leave them vulnerable to real estate market swings, making it more difficult to get money out of the real estate than it would be to get it out of a qualified investment plan.

Locking money into something from which it cannot be easily retrieved means no liquidity, which translates into a cash flow shortage. However, this is not to imply that no one should pay off a mortgage, but simply that everyone needs to think carefully before accumulating debt elsewhere, even though it is tempting to be ‘mortgage-free.’

Homeowners should consider using a mortgage to accumulate assets. For example, if someone has the option of either making a $2,500.00 principal and interest payment, or making a $1,500.00 interest only payment to invest the remaining $1,000.00, the homeowner can then use the extra thousand dollars for asset accumulation.

One such option would be investing in triple, tax-free bonds which provide the homeowner with a liquid investment ensuring that the money would be available the next day if the need arises. 

The bottom line?

It doesn’t make sense to be real estate rich and cash poor. Speak with your investment and financial advisors and consider the available options before making a decision.

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Robert B. Withers, president of Withers & Company in New Rochelle and a Certified Mortgage Planning Specialist. He has been meeting the mortgage needs of individuals and commercial clients for more than 20 years. He is an experienced leader in the mortgage industry. Robert has been featured and quoted in numerous area publications including The Journal News, The New York Times, Real Estate In-Depth and The Westchester County Business Journal.  He has appeared on CNN, Good Day New York and Bloomberg Radio. Reach him at 914-633-4100 or rwithers@mortgage1.com