Should I Pay Off My Home?

I will share a story that has been repeated countless times in my life. A couple whose home had gone up significantly in price commented that they had enormous wealth tied up in their homes’ equity “doing nothing” for them. They were considering borrowing against their home and investing the money at potentially higher rates of return.

Their logic made sense. If you could borrow at 4% and re-invest at maybe 8%, why wouldn’t you do it? I suggested that they might be overlooking something critical. They were calculating “rate of return” based solely on dollars. This is a common practice among investors, but there is far more to investing than just growing dollars. In fact, I might be bold by declaring that many of the dollars people chase end up having little value to them. I can say this because in my decades as a financial advisor, I have never had a client run out of money. This means that all of them, so far, got to the end of their lives with more money than they needed, and most of them with much more.

I believe that perhaps the greatest return on investing is not measured in dollars. It is measured in the peace of knowing that when economic storms come, we can survive them. It is the peace of being able to help a family member in need. It is the peace knowing we can enjoy a nice retirement. Dollars are important to all this, but I prefer that an investor looks at their overall financial situation and feels at peace rather than saying, “Oh look how much richer I am today.” If those growing dollars are not accompanied by an inner peace, then what good are they?

Now back to the house question. I heard a successful man tell how he had decided to pay off his mortgage. Because the interest rate was low, his financial advisor had suggested that investing his extra money rather than paying the debt would likely bring a greater rate of return. Mathematically, the man agreed, but he was seeking a different type of rate of return on these particular dollars. So he paid off the home and then stated proudly, “And the smile has never left my face.”

That “smile” can be a rate of return far greater than any percentage might be. I love to invest and I enjoy helping clients grow their portfolios. But I also recognize that not all rates of return can be found on a calculator. For this reason I encourage people to seek to pay off their primary home, and any other unnecessary debts. Doing so may not always add up mathematically, but it can bring tremendous peace of mind. Once you include peace of mind in your rate of return calculation, then it actually frees you up to invest other dollars more effectively. When your family’s home is safe from the storm, then the storm becomes much more bearable. Now that’s a rate of return to get excited about.