Carrying a Mortgage: Pro or Con?

Debt or a mortgage on your home is not necessarily a bad thing. There are pros and cons to holding a mortgage versus owning your home outright.

And there is no right or wrong answer. Looking strictly at the numbers can lead you to one conclusion, whereas emotional reasons can lead you to a totally different one.

A primary reason for paying off your mortgage is peace of mind. Knowing your family will have a place to live no matter what happens is very comforting. Reducing your monthly financial obligations, especially in retirement, is another reason to not maintain a mortgage payment.

On the flip side of the coin, having a significant amount of your assets tied up in one place carries its own brand of risk. A home should be considered a personal asset, not an investment. Housing values go up and down based on factors beyond your control. Your home is located on one block in one city. Its value can depend on whether your neighbors take care of their property, the city converts your street into a thoroughfare or a developer builds new homes next door for much less than what you paid.

In addition, personal residences are not liquid assets. If you need to raise funds for living expenses, it can take weeks or months to prepare your home for sale. Depending on market conditions, your home may sell quickly or it may sit on the market for some time. After you consider closing costs, realty commissions, necessary repairs and moving costs, the amount you net out of the selling price may be less than you expected.

Once you pay off your mortgage, much of your net worth may be tied up in one very expensive asset. Carrying a long-term mortgage can allow you to balance your resources between multiple goals, such as funding your 401(k) or putting your children through college. Investing in a diversified portfolio, in addition to purchasing a home, may reduce your overall level of risk.

Mortgage interest rates are relatively low compared to borrowing on credit cards and other types of debt. You are better off carrying a mortgage at a 2.5 percent to 5 percent interest rate than you would be carrying a credit card balance at a 13 percent to 24 percent interest rate. Once you have locked into a long-term fixed mortgage, if interest rates rise, your monthly payment will remain the same for as long as you own the home or retain that mortgage.

Having a mortgage can also offer tax savings if you are able to itemize your deductions. If you are paying 30 percent in combined federal and state income taxes, a 4.5 percent interest rate on your mortgage will actually cost a net of 3.15 percent after the tax savings.

While other costs, such as groceries, travel and utilities, may go up with inflation, your mortgage payment will remain the same for the term of the loan if you take out a fixed mortgage rather than an adjustable rate mortgage. And if your income increases over time, your mortgage payment as a percentage of your income will go down.

However, carrying a mortgage makes sense only if you are purchasing a home that is affordable in the first place. Just because mortgage rates are low doesn’t mean you should purchase a home that is more than you can afford based on your other assets and your income. If you have to sell the home for any reason, and the mortgage is higher than your net sales proceeds, you will be on the hook for the balance of the mortgage.

You should also consider keeping cash reserves to help you make your mortgage payments, along with any other living expenses, in case of emergency or if your monthly income decreases for any reason.

Just looking at the numbers, carrying a mortgage can be a good financial decision. However, personal circumstances and emotional reasons are equally important to consider. If you are not a good money manager, keeping your debt low may be the right decision. And if having your home paid off lets you sleep better at night, that can be more important that what the numbers show.

 This commentary originally appeared October 1 on

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The opinions expressed by featured authors are their own and may not accurately reflect those of the BAM ALLIANCE. This article is for general information only and is not intended to serve as specific financial, accounting or tax advice.

© 2016, The BAM ALLIANCE

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Connie Brezik, CPA/PFS, CFP®

As a wealth advisor at Buckingham Strategic Wealth, Connie works with clients to form a comprehensive financial plan tailored to their individual circumstances, one that includes portfolio management, tax strategies, wealth transfer considerations, retirement analysis and education planning. She welcomes the chance to help clients work through difficult situations, finding solutions that they may not have thought of and guidance about what to do if their plans don't work out as anticipated.

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