Think of all those monthly payments you'll be saving.
WASHINGTON — I know where to get a guaranteed 6 percent return on savings, with no brokerage commissions, bank fees or worries that the Feds are going to have to swoop in and take over the failed institution that has my money. I'm putting whatever extra cash I can find into paying off my mortgage early.
The strategy is as old-school as they come, but, lately, these mortgage prepayments have been our household's highest-performing investment. That's true even when you consider that a shrinking mortgage balance nibbles away at our most important income-tax deduction.
It's almost as conservative as stashing cash under the mattress — but with better protection against burglars.
This is not a strategy that will build enough wealth for retirement. You still need to make regular contributions to 401(k) accounts and other investments that offer more potential for higher returns. Those accounts' performance statements haven't looked good lately, but my husband and I have faith that shares bought during bad markets will pay us back decades into the future when we need the money.
But a tax refund or any other extra cash that comes our way gets put toward paying off the mortgage.
The strategy is not without downsides, of course. It could be hard to get at that money if we need it. With credit markets as dysfunctional as they are now, no one should assume they can get quick approval for a home-equity loan, line of credit or a cash-out refinance. (Although boosting equity through prepayment certainly raises the odds of loan approval.) Selling a house to free up equity is no easy trick, either. The lower your mortgage interest rate, the lower your return on mortgage prepayment.
But we're hardly alone on this path. Marjorie Fox, a lawyer and certified financial planner in Reston, Va., said that recently, more of her clients have been expressing an interest in paying off the mortgage on their primary home or on their vacation place. More of them have been noticing that the rate they're paying on their mortgage is higher than the return they're bringing in on their investments, making mortgage prepayment tempting.
"More clients are beginning to look at it that way because of the turmoil in the markets, particularly if retirement is in the not-too-distant future," Fox said. "We have some clients who say, 'I want to be mortgage-free when I retire.' "
Still, she said most of her clients, who typically have at least $1 million in investable assets, don't want to pay off the debt early. "They're comfortable with their cash flow in retirement," Fox said. That can be particularly true if they bought the home years ago at a relatively low price, and those small mortgage payments just don't represent much of a burden on their retirement income.
Certainly, prepaying the mortgage should not be the cornerstone of your retirement planning. Your money won't grow enough to fund your retirement, especially considering the way inflation will make tomorrow's bills more burdensome than today's. Make sure you are investing as much as you should in any retirement accounts available to you. In particular, if your employer offers a 401(k) savings plan, you need to contribute at least enough to qualify for any matching contributions your employer will make. An employer's match "is 100 percent return on those savings dollars," Fox said. Any investment gains would push your payoff above 100 percent. Who can afford to pass that up?
The argument in favor of mortgage prepayment that I have found most compelling has come from retirees who live mortgage-free. I have never heard one bemoan the loss of that monthly payment.