Should you pay off a mortgage or invest the money?

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Some people may have the option to pay off a mortgage or invest a lump sum of money. Interest rates have just gone up for the first time in almost a decade. Which brings up the question of mortgages. Is it better to pay off your mortgage or invest your money instead? Are there tax advantages? What about having a mortgage in retirement?

There isn’t a real tax advantage to paying off your house. You save the interest expense but maybe you don’t have enough other expenses that you’re itemizing. Any finance professor in graduate school would say that he would go eliminate the mortgage interest rate deduction.

The right decision depends wholly on your personal financial situation. Sure, mortgage interest and property taxes are tax-deductible, but the amount of interest and taxes typically paid on a median-priced home in the U.S. results in unimpressive tax benefits. If you live in the Midwest, are in the 25 percent tax bracket and you have 20 percent equity in your median-priced home, there are possibly no tax benefits at all. If, after retirement, you will be relying on a mix of Social Security and savings from an IRA or 401(k) for income, reducing the number of pretax dollars you have to spend is startlingly important.

Social Security benefits become taxable for a married couple filing jointly when one-half of their total Social Security benefit added to all their other income is greater than $32,000 or $25,000 for a single individual. Between Social Security and an untaxed nest egg, people are thrown into a position where all of their withdrawals and the majority of their Social Security is taxable. The longer people can defer touching their untaxed nest egg, the better off they are.

Before you make your decision, you must determine if you have enough money set aside. As long as this money isn’t in your 401k or IRA, then it’s time you have a reasonable discussion with a financial advisor about what is best for you. The question you will answer together is: how important is it to you to not be making a monthly mortgage payment or do you need the liquidity?

Mark Stratis is a Certified Financial Planner, and he has been working with individuals and small businesses in the insurance, employee benefits, financial and investment planning areas since 1979. He is co-author of Money Talks: Life Lessons to Help You Plan Now, Save Wisely, and Retire Well.