There’s no doubt that not having any debt can give you a certain sense of freedom. When you don’t owe anything to anybody, the money you have is yours to do with as you wish—a great retirement dream scenario. But as we all know from experience, reality can be a bit different.
In an ideal world, none of us would have any debt—ever. And we’d certainly pay off our mortgages, credit cards, and car loans before we retire. But that’s not always possible. And sometimes, it’s not even the best thing to do. As I discussed a bit in My Top Ten Recommendations on page 3, debt isn’t necessarily negative. In fact, in the financial world there’s a common distinction made between “good debt” and “bad debt.” But you have to know the difference. And to keep debt from ruining your plans, you also have to figure out how much debt you can comfortably handle on your retirement income. Here are some ways to go about it.
The question of whether it’s better to be completely debt-free or have a mortgage is one that many homeowners wrestle with On one hand, being mortgage-free can provide a tremendous sense of freedom and security On the other hand, there may be financial advantages to continuing to carry a mortgage. In this article, we’ll take an in-depth look at the pros and cons of both paths to help you make the best decision for your situation.
The Case for Being 100% Debt-Free
For many people, the dream is to fully own their home by paying off their mortgage early. Here are some of the biggest benefits of being mortgage-free:
1. More Cash Flow
Without a monthly mortgage payment, you free up a significant amount of money every month. For most homeowners, the mortgage payment is their single largest monthly expense. Eliminating this frees up capital that can be used to max out retirement contributions, take dream vacations, remodel your home, or anything else you’ve been putting off.
2. Reduced Financial Risk
When you owe nothing on your home, you insulate yourself from some financial risks. If you lose your job or income you won’t risk foreclosure or be forced to sell. For many this peace of mind is priceless.
3. Ability to Downsize
If you sell your home after paying off the mortgage, every dollar goes straight to your pocket. This makes downsizing or relocating much easier since you’ll get the full sale price to put towards your next home.
4. Forced Savings
A mortgage payment includes principal that goes towards paying down the loan balance By eliminating your mortgage early, you essentially “force” extra savings that may be difficult through willpower alone This builds equity faster.
5. Sense of Pride and Accomplishment
For many homeowners, paying off their mortgage is a major life goal and source of pride. Being able to burn the mortgage documents provides a tremendous sense of accomplishment.
Reasons a Mortgage Might Make Sense
While being 100% debt-free is ideal for some, carrying a mortgage can also be advantageous depending on your situation:
1. Low Interest Rates
Today’s historically low mortgage rates mean the cost of borrowing is incredibly cheap. For example, a 3% rate means you’re effectively only paying $3 per year in interest for every $100 you borrow. That interest expense may be outweighed by investment returns.
2. Tax Deductions
Mortgage interest and property taxes can be deducted on your taxes. This deduction can provide thousands in savings each year if you itemize.
3. Leverage
A mortgage allows you to finance a more expensive home by borrowing at low rates. This gives you leverage to build equity through your home rather than renting or buying a lower priced property.
4. Retain Liquidity
Paying cash for a home ties up your funds. A mortgage allows you to keep your capital free for other uses like investing, paying tuition, starting a business, or emergencies. This flexibility and liquidity can provide peace of mind.
5. Offset Inflation
Inflation steadily erodes the value of debt over time. A 30-year fixed rate mortgage locks in a payment that won’t increase. As inflation rises, the real cost of your mortgage decreases.
Key Factors to Consider
When deciding between being mortgage-free or continuing to carry a loan, here are some key factors to weigh:
Your Risk Tolerance – If job security or income fluctuations are a concern, minimizing obligations may take priority.
Your Age and Time Horizon – Paying off a mortgage makes more sense closer to retirement when your income years are limited.
Interest Rate – The lower the rate, the more attractive it may be to carry the mortgage.
Opportunity Cost – Will tying up funds in your home prevent more profitable investments elsewhere?
Taxes – Will losing the mortgage interest deduction raise your tax burden significantly?
Liquidity Needs – Will eliminating your mortgage undermine your ability to access funds if needed?
Inflation Outlook – If high inflation is expected, the value of a fixed-rate mortgage increases.
Striking the Right Balance
As with most big money decisions, there’s no one-size-fits-all answer to whether it’s better to be debt-free or carry a mortgage. The “best” approach depends entirely on your unique financial situation, goals, time horizon, and risk tolerance.
Many financial experts suggest a balanced approach may be optimal:
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Pay down your mortgage aggressively early on to build equity and reduce interest costs quicker
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Then reduce extra payments as you near retirement to free up liquidity and maintain deductions
This allows you to enjoy the advantages of reaching a mortgage-free status eventually while also benefitting from deductions, low rates, leverage and liquidity while you need them.
To determine the ideal mortgage payoff timeline and strategy, it’s wise to consult fee-only financial advisors who can objectively analyze your full financial picture. There are also online calculators that can forecast whether it makes more sense to pay off your mortgage early or invest your extra funds instead.
At the end of the day, choose the path that helps you sleep better at night. For some that means the security of no mortgage. For others, it’s the flexibility that strategic debt allows. But with the right approach, you can structure your mortgage paydown to optimize advantages on both sides at different stages of life.
Behind the Scenes: What Credit Card Debt Really Costs You
When you want that new top-of-the-line flat-screen TV, it’s easy to whip out the plastic and figure you’ll pay it off over time. But when you stop to calculate what that single purchase can cost you if you don’t pay it off right away, the numbers could make you think again before you buy. Here are three eye-opening scenarios:
Cost of TV: $5,000; interest rate: 14%
- Make the minimum payment each month (usually interest plus 1%) and it will take you 264 months (22 years!) to pay it off. During that time you’ll pay $5,333.30 in interest, more than doubling the original cost of the TV.
- Make a fixed monthly payment of $200 and it will take you 30 months to pay if off with $946.23 in interest.
- Up your monthly payment to $500 and you’ll have your TV paid off in 11 months and pay only $348.12 in interest.
Of course the best scenario of all is to pay cash to avoid any interest charges. The numbers speak for themselves!
How Much Debt Can You Afford? The 28/36 Rule
- 28%—An industry rule of thumb suggests that no more than 28 percent of your pretax household income should go to servicing home debt (principal, interest, taxes, and insurance).
- 36%—No more than 36 percent of your pretax income should go to all debt: your home debt plus credit card debt and auto loans.
As you look ahead, I think you should be even more conservative. While these percentages may be manageable when you’re working, I suggest keeping debt much lower in retirement.
Safe Debt Guidelines 
Don’t try to tackle all your debt at once. You’ll likely just become frustrated and discouraged. Instead, prioritize.
If you have credit card debt, that’s your first priority. Make a list of your credit cards and balances, from the highest-interest card to the lowest. Focus on highest-interest debt first, increasing the payment if you can, while continuing to at least make minimum payments on the rest. Work your way down until everything is paid off. And give yourself a pat on the back as you eliminate one debt after another.
Another way to approach multiple credit card debts is to consolidate them on a low-interest card and pay the maximum that you can afford each month. But be very wary of loan consolidation offers. While some are legitimate, others have up-front fees and hidden costs.
Why You Should Focus On Paying Down The Mortgage Over Investing
FAQ
Is it better to be debt free or have a mortgage?
Debt that creates opportunities can actually work for you. If it’s also low cost and has tax advantages, so much the better. For instance, with mortgages or home equity lines of credit, you’re borrowing to own a potentially appreciating asset. On top of that, home loans may be tax-deductible.
Do most millionaires pay off their mortgage?
In fact, the average millionaire pays off their house in just 10.2 years. But even though you’re dead set on ditching your mortgage ahead of schedule, you probably have one major question on your mind: How do I pay off my mortgage faster?
Is it better to buy a house with no debt?
So, while you needn’t be debt free, being debt free does help when negotiating a loan, and the less debt you have the bigger loan you can handle (and more options for a home are available).
Does 1% make a difference on a mortgage?
A 1 percentage point difference in mortgage rates can make a huge difference cost-wise. For example, a $300,000, 30-year mortgage at a 7% interest rate would come with a $1,996 monthly payment and over $418,000 in total interest. A 6% rate, on the other hand, would have a $1,799 payment and $347,515 in total interest.