The 'Great Resignation' is leaving many Americans wondering: Should I pay off my mortgage early?  As much as you may want to rid yourself of your mortgage, don't do it if you'll leave yourself with an inadequate savings cushion, one expert says. | It's been drilled into Americans that a mortgage is good debt, a liability that shouldn't give you pause, even after you retire. But the pandemic has been shaking up a lot of old financial rules. The "Great Resignation," as it's being called for those quitting their jobs, is making a lot of homeowners wonder if they should consider paying off their mortgage early. A record 4.3 million U.S. workers quit their jobs in August, according to data from the Bureau of Labor Statistics. With covid still surging in areas, working comes with health risks for many people. The pay isn't enough to offset the possibility of getting covid, so they quit. For others, the pandemic death toll has made them wonder if their work took too much precedence over living their best life. While not everyone who quits can afford to get rid of their mortgage early, for those who have the option, the question is: Why not? I spoke with two experts to get their take on the pros and cons of paying off a mortgage early. Let's start with some of the cons. Being house poor — "I owe just under $80,000 on my home mortgage," one reader wrote. "I am retired, and I have the cash to pay the loan, but it will wipe out over half of my savings. I am on track to pay the mortgage in less than three years." As much as you may want to rid yourself of your mortgage, don't do it if you'll leave yourself with an inadequate savings cushion, says Michael Roberts, a professor of finance at Wharton. Less to invest — "The easiest way to distill the decision down is to think of it in terms of opportunity cost," Roberts said. Ask yourself this question: Is the interest on my mortgage greater than what I can earn from saving or investing this money? Loss of mortgage interest deduction — If you itemize, you can deduct home mortgage interest on the first $750,000 ($375,000 if married filing separately). The limit is $1 million ($500,000 if married filing separately) if you are deducting mortgage interest for a home purchased before Dec. 16, 2017. Even if you take the deduction for mortgage interest, don't overestimate its value. This tax break is a deduction, not a credit. A tax credit reduces, dollar for dollar, the taxes you owe. A deduction eliminates only a percentage of your income subject to taxation. The 2017 Tax Cuts and Jobs Act nearly doubled the standard deduction, resulting in fewer taxpayers itemizing deductions on their tax returns. Now let's look at some positive reasons to pay off your mortgage early. Better cash flow — The mortgage for most Americans is their biggest household expense. Getting rid of that obligation frees up a significant amount of cash every month. We already know, based on data from the Federal Reserve, that many households have trouble responding to a financial emergency without having to borrow money. Sandy Marasco paid the $22,000 remaining balance of her mortgage with savings, which was costing her $1,200. She has a 401(k) but can get by on Social Security and a small pension. "I finally decided to retire, and I wanted to get my monthly expenses down as much as possible," she said. "I went through my younger years with too much debt. Something disastrous would have to happen for me not to have a place to live." Guaranteed return — One of the reasons people are often discouraged from paying off their home loans is that they are told they can earn more by investing in the stock market. But this advice ignores risk, says Christine Benz, director of personal finance for Morningstar. "If you're retiring debt, you are getting a positive return equal to whatever that interest rate was on the debt, less any tax breaks you were getting for carrying it," Benz said. For young adult homeowners, they could reasonably outearn that interest rate by investing in the market, and they don't necessarily need that peace of mind of paying off the mortgage, Benz said. But for people closing in on retirement, or who are retired and have other assets, paying off the mortgage could be a great move. "One of the best things you can do for your plan is to reduce your fixed expenses coming into retirement," Benz said. "Reduce the head wind of ongoing expenses and that will make you so much more flexible in the face of whatever might happen in your retirement, whether it's big health-care bills or a bad stock market." Roberts also acknowledged that the flip side of investing the money for a higher return is recognizing that past performance of the stock market does not guarantee future results. "If you try to find an investment that guarantees you an income at the same rate of return, it will almost surely be lower than what you're paying on your mortgage," he said. Peace of mind — "There's sort of a big psychological burden that's lifted," Roberts said. "So having the overhang of debt payments constantly is psychologically important. And that might sound odd coming from an economist, but it's precisely because I'm an economist that I can recognize the importance of psychological factors." If you have the money to pay off the mortgage and there's not a liquidity issue, meaning you have enough in savings, then your financial peace of mind is a legitimate factor in this decision, Benz said. One Maryland couple plans to retire their mortgage early in December. They are both retired and have more than adequate savings. Their mortgage wouldn't have been paid off until 2043. "Most people keep telling us, 'You're always going to owe something,' " the husband said. "Most people just don't believe they can be debt-free. But I just keep remembering the loss of the mortgage payment will help us to save and give more." Reader Question of the Week If you have a personal finance or retirement question, send it to colorofmoney@washpost.com. In the subject line, put "Question of the Week." Please note that questions may be edited for clarity. Q: My husband is turning 80 and I'm 75. We have a mortgage on our home and wonder if it's best to pay it off and own the home outright. Is there a right or wrong to this situation? A: I'm an advocate of becoming debt-free as soon as possible from car loans, student loans, credit card debt, and a mortgage. But as you can see from the earlier discussion in this newsletter, the right answer really is, "it depends." Personally, I can't wait to get rid of my mortgage. I'm having a party — probably virtually — when I part ways with my mortgage lender. But you may not want to pay off your mortgage early if the following were an issue: - A prepayment penalty. Just make sure you aren't penalized for paying off the mortgage early. This fee is used by lenders to discourage borrowers from paying more than their scheduled periodic payment or paying off their mortgage early. Fortunately, most borrowers aren't subject to a prepayment penalty and when they are it must be disclosed. "They're associated with non-conforming mortgages — loans not sold or insured by government-sponsored enterprises such as Fannie Mae or Freddie Mac — and they don't apply to conventional, FHA, VA or USDA home loans," Anna DeSimone, a New York City-based personal finance expert, explained to Bankrate.com. If you want to know more about this and the limits on how much you can be charged should you have a prepayment penalty read: What is a prepayment penalty?
- Adequate savings. Don't decimate your emergency fund or retirement investment account to get rid of the mortgage. You don't want to be "house rich, cash poor." This means that all your money is tied up in your home. To access the equity, you would have to sell or take out a loan.
- You plan to move anytime soon. If you prepay your mortgage and sell in a down housing market, you might not get back the money you put on the mortgage.
This really isn't about being right or wrong. It's more about what's best for your financial situation. Here's some additional reading on the subject: Thinking about paying off your mortgage early? Here are the benefits — and the risks. Why paying off your mortgage early may make sense — if you can afford it Why you might not get your promissory note back when you pay off your mortgage, and what you can do about it In Retirement News Part of planning for retirement and then living on the money you've saved or invested is keeping up with the issues that you need to know. In this section, I feature blogs, news stories, new research, surveys and government policy changes that could affect your retirement. If you see a news story or issue you think would help folks, let me know, and I'll check it out and share it with newsletter subscribers. Question for you: Do headlines about the coming shortfall in Social Security scare you? Are you likely to make any financial changes because of the news? Social Security and Medicare face long-term financing shortfalls and have been significantly affected by the pandemic and the recession of 2020, according to reports released last month by the Social Security Board of Trustees. Of course, there was coverage of the reports. Here are just a few headlines: Should You Count on Collecting Social Security Someday? Is Social Security on the Brink of Insolvency? Op-ed: Social Security trust fund will die in 2033. You need to take action now Here's how much your benefits could drop if Social Security trusts run out of money This was the headline on my column about the report: Covid took one year off the financial life of the Social Security retirement fund The trustees projected that the Old-Age and Survivors Insurance (OASI) Trust Fund, which pays retirement and survivors benefits, will be insolvent in 2033, meaning there will be enough income to pay out only 76 percent of scheduled payments. Social Security is in trouble and needs to be fixed. But projections show there will still be money coming in for beneficiaries, just not enough. "News coverage of the Trustees Report often emphasizes the trust fund depletion date and de-emphasizes the importance of the ongoing tax revenues," write Laura D. Quinby and Gal Wettstein, senior research economists at the Center for Retirement Research at Boston College, in a brief this month that argues the news is too dire. "This emphasis could lead the public to believe that all future benefits are insecure," they continue. "The question is, how do workers respond to their misperceptions? On the one hand, they might claim their benefits earlier than originally planned in the belief that future reforms will spare individuals already on the rolls from benefit reductions – even though, if they claim at age 62 today, their monthly benefit will be reduced by 30 percent for claiming early, and their lifetime benefits will likely be lower as well. On the other hand, workers might insure against future reductions in Social Security benefits by saving more on their own, thereby enhancing their retirement prospects." In their brief, Quinby and Wettstein point to a study that used an online experiment to gauge how different headlines about Social Security's financial situation might impact when people claim their benefit. The 3,118 study participants were ages 21 to 61. They either were working or had already accumulated 40 quarters to qualify for future Social Security retirement benefits. The participants were divided into four subgroups, with each group shown a different headline. The experiment found that, depending on the headline, people were scared into claiming Social Security retirement benefits early. How early depended on how dire the headline was. "These findings suggest that media coverage of the trust fund depletion scares workers," Alicia H. Munnell, director of the Center for Retirement Research at Boston College, wrote in a column for MarketWatch. "Providing salient information about ongoing program revenues helps align workers' expectations with a more likely scenario but may not be sufficient to prevent workers from claiming early. If future beneficiaries follow through with their intention to claim a year earlier, they will lock in lower monthly benefits without increasing their saving to make up the gap." Here's the brief: How Does Media Coverage of Social Security Affect Worker Behavior? I'd be interested in what you think of the findings. Are you scared? Are you thinking of claiming early? Did you claim early for fear Social Security would be broke? Send your comments to colorofmoney@washpost.com Retirement Rants and Raves This is also your space to rant or rave about anything related to retirement. Send your comments to colorofmoney@washpost.com. Please include your name, city, and state. In the subject line, put "Retirement Rants and Raves." Responses may be edited for clarity. | 
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