Resist that urge to pay off your mortgage before retirement

Burning the mortgage — or,  as Art Stein put it, telling the bank to go to hell — presents a tempting notion for people nearing retirement. After all, you get all that accrued equity out of the old split-level or center-entrance colonial, and that monthly mortgage nut goes away.

But strongly as the siren calls to get out of debt, it might be an unwise move. Stein said that home equity operates as the equivalent of a savings account that pays no interest and produces no growth. Why would you plow maybe hundreds of thousands of dollars into that?

A pause here to say that Stein, a Bethesda, Maryland certified financial planner, had been a regular guest on the late Mike Causey’s weekly “Your Turn” show. Art will now appear monthly on my show, “Federal Drive with Tom Temin.” Hear him on the third Wednesday of the month. His first appearance was Oct. 19, and we discussed this very topic.

Stein acknowledged the desire to be totally free of debt is powerful. But selling and moving is expensive, even if you downsize. And what if you don’t really want to move? I personally have this very question. Sometimes I think a cheap, sunny place beckons. But as a season ticket holder to both the Washington Nationals and the National Opera, I wonder how I’d really like it without big-league baseball and arts, to say nothing of being thousands of furlongs away from the grandkids.

Besides, moving compounds the stress of retirement. There’s no rush. You can always move later. These days, selling a house can be a major expense all on its own. Real estate agencies want you to put all your furniture in hiding, remove any evidence that someone lives in the house, and paint everything white. They call it staging. No velour ottoman or faux-gilt framed bar mitzvah photos.

Some people might have the cash to retire the mortgage, and plow it into the payoff, but stay put. Stein points out, that simply takes money that could otherwise be growing through investment and nullifying it. Basically, you’d be enlarging the non-growth, zero interest part of your portfolio.

Good financial planners have sophisticated planning programs that fuse all of your spending patterns, income, TSP growth estimates, and required minimum withdrawals. They calculate your probability of maintaining your lifestyle. You might find you can keep your mortgage, divert the payoff to productive investments, and still stay where you are and make the payments.

“Home equity is equivalent to a savings account with a 0% interest rate. And if you put another $100,000 in that savings account, then it’s going to be worth more. But no one would say well gee, the savings account earns money,” Stein said. “It doesn’t earn any money. That that’s a lot of money to have with a 0% rate of return.”

Ditto for making extra monthly payments to speed up retirement of your mortgage. Why spend $300 against a mortgage when you could be putting that $300 to work in an investment?

This is all especially compelling if you refinanced in recent years to obtain a super-low mortgage interest rate. You can buy Treasury short-term bonds now that pay you twice what you’re paying the back in mortgage interest. The obvious return calculus doesn’t even include the tax benefits of your mortgage payments.

Maybe you’re just pining for a new place. Try pretending you’re going to move, and then get rid of as much stuff as you can. You might find that old place seems new again, even with the velour ottoman.

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