A question we get asked often is “should I pay off my mortgage?”
The math might be a little different now because the deductibility of mortgage interest has changed thanks to the new law and with the standard deduction being much higher, maybe more people might not itemize, meaning they won’t get the deduction.
One of the things we say is well the potential deductibility might matter and it might not, but what matters more is probably what your mortgage interest rate is.
We’ve talked to people recently who are paying 2.5 or 3% on their mortgage, and for some people that’s even deductible or partially deductible. If inflation is 2% and you’re paying someone else 2.5%, that’s partially deductible or 3% or even 3.5% that’s partially or fully deductible, basically they are giving you that money for free. And so, if something’s free, I generally say to take it.
It may not depend on whether it’s deductible or whether you lose that deduction, I’d say the interest rate usually matters more. If you are paying 6% or 7% because you never refinanced or maybe you couldn’t refinance at the time, then I would urge you to try to re-finance or do your best to whittle that balance down now if you can. Otherwise, if you’re paying a rate under 4%, I would question whether paying it off sooner than you have to is a good idea because you lose ready access to that cash and your return is going to be negligible or even negative.
Of course, if you feel very strongly about it or if it makes you really nervous, then I’d say maybe you should pay it off. There are a lot of things more important than marginally improving your returns and everyone’s situation is different.
