Many of us have deeply rooted beliefs, which date back to the Great Depression, that we must payoff our mortgage. As a matter of fact, people used to host mortgage burning parties once their mortgage was paid off. The idea that we must payoff our mortgage has been ingrained into many of our minds by our parents or grandparents generation.
Does this belief still hold true today? Is paying off your mortgage the best investment strategy given all the new products and solutions available?
This becomes a philosophical and potentially a very personal decision. I believe the idea of paying off your mortgage is an outdated philosophy and is extremely inefficient financially. There are many reasons why people want to payoff their mortgage, here are the most common reasons I hear from clients:
- To eliminate monthly expenses; to not have a mortgage payment
- For security reasons; so nobody can ever take their home away from them
- For legacy planning; to leave their home to their heirs
When I meet with clients these are the reasons, I hear most often. Let’s break these down in greater detail.
The idea of not having to make a mortgage payment is quite attractive, I can absolutely understand this goal. Let’s face it, when we retire, our income typically decreases so if we can cut out making a mortgage payment (which is typically most people’s largest expense in retirement), this can be a huge financial relief. Guess what? A reverse mortgage achieves this goal…you never have to make a mortgage payment as long as you live in the home, pay property taxes, and home insurance.
As far as the security of knowing that nobody can ever take your home away from you, I believe this stems from fear. During the Great Depression, when Americans were panicking and taking their deposits out of banks, banks were forced to call mortgages due and payable to get cash or they would become insolvent. Due to the economy, many people were simply unable to make their mortgage and were forced from their homes. The Great Depression left a very lasting and scary impression on the Greatest Generation and the Silent Generation which certainly spilled over to the Baby Boomer Generation as well. Did you know, you still own your home when you have a reverse mortgage, the lender does not? Furthermore, as long as you live in the home, pay the property taxes and home insurance, the lender cannot take your home from you.
Last, let’s talk about legacy planning. This is the most complicated and fascinating topic. We all want to leave something to the next generation to remember us by. Historically, your home has been the asset we earmark as what we want to leave to our kids. We use the money we have put away in savings account, IRA or 401K and other assets for cash flow in retirement. Historically, people would not use their home equity except as a last resort…if they ran out of money, then they would get a reverse mortgage to get access to some of their home equity. However, there has been a significant amount of research done over the last 7-8 years on the new reverse mortgage and using home equity as part of an orchestrated strategy in retirement. The bottom line is that this new research has proven that if you incorporate home equity earlier in retirement, you will preserve and protect your other assets allowing them more time to grow, pay less in income taxes, and increase your probability of achieving your financial goals. Mathematically, this has be proven every single time. Guess what…you got it, a reverse mortgage is the best financial tool to achieve this goal.
The idea of owning your home free and clear, though it may have a nice ring to it, is not the best investment strategy. It simply means you have hundreds of thousands of dollars locked up in your home and no ability to access it. The reverse mortgage is a safe and flexible tool which allows you to access a portion of the equity in your home, while maintaining ownership of your home. And if it is still important, there is a way to pass your home onto your heirs!
