Never Pay Off Your “Forever” Home

The Proposal:

1. Enter a 30-year fixed mortgage at current rates (sub-3%) with a 20% down payment.
2. Pay the minimum payment monthly.
3. When you reach some pre-defined amount of equity (let’s say 50%), perform a cash-out refinance to 20% equity to avoid PMI.
4. Invest the equity pulled out back in the market, your business, real estate, etc.

Benefits:

1. Equity appreciation in your home can generate higher ROI in the capital markets.
2. Mortgage interest payments are tax-deductible.
3. If your business takes place in your home, you can write off home office expenses, which will be more substantial if the home is not paid off.

Pitfalls:

1. Intangible loss of peace of mind that comes with owning a fully paid-off home.
2. Estate planning complexity, especially if the mortgage is carried high into retirement.
3. The need to use home equity capital in an asset that will generate more than your interest rate.
4. This strategy may exacerbate sequence of returns risk by increasing annual expenses in retirement.

Other Considerations:

ACA subsidies and FAFSA: Having a mortgage may affect eligibility for healthcare subsidies under the Affordable Care Act (ACA) and financial aid for college (FAFSA). Paying off the mortgage could increase taxable income, resulting in lower subsidies and higher out-of-pocket expenses.
Investment returns vs. interest rates: The success of this strategy depends on investment returns being higher than the cost of the mortgage interest. Historically, this has been true, but there is no guarantee.
Refinancing options: When interest rates rise, refinancing options become more limited, making it more difficult to cash out equity.
Loss of home in financial hardship: If you lose your job or experience a significant income reduction, maintaining mortgage payments can become difficult. Owning a paid-off home provides more financial security in such situations.
Peace of mind: For many people, owning a paid-off home provides a sense of security and well-being. This is an important factor to consider when making the decision of whether or not to pay off a mortgage.

Ultimately, the decision of whether or not to pay off your “forever” home is a personal one, depending on your individual circumstances and priorities. Carefully consider the potential benefits and risks before making a decision.