Being mortgage-free certainly has its perks, especially in retirement. Not being responsible for those monthly payments can free up more income to enjoy a comfortable lifestyle as a retiree. But that doesnât always mean you should pay off your mortgage before you retire.
Prioritizing your mortgage over other financial goals will depend entirely on your unique financial situation. So what should you pay off before you retire? The answer depends on your long-term goals.
Deciding whether to pay off your mortgage before retirement ultimately depends on your financial situation, lifestyle, and peace of mind. If carrying a mortgage during retirement causes you stress, paying it off could be the right choice. However, there are several factors to consider when making this decision.
Pros of Paying Off Your Mortgage Before Retirement
Here are some potential benefits of becoming mortgage-free prior to retirement:
Reduced Expenses
Your mortgage payment likely represents a significant portion of your monthly expenses Eliminating this payment frees up cash flow that you can use to help cover other costs in retirement This can be especially helpful if you are on a fixed income,
Interest Savings
Depending on the size of your mortgage balance, interest rate, and loan term, you may pay hundreds of thousands of dollars in interest over the life of your loan Paying it off early allows you to keep these funds for other uses
Peace of Mind
For many homeowners, being mortgage-free provides tremendous psychological benefits. It eliminates a major recurring stressor and can give you more flexibility and security in retirement.
Lower Withdrawal Rate
If you plan to use retirement savings to help cover expenses, having your home paid off means you may be able to withdraw less each year since you won’t need as much income. This can help extend the lifespan of your portfolio.
Protection From Risk
Paying off your mortgage eliminates the risk that rising interest rates or reductions in income could make your payments unaffordable. It also removes concerns about being able to make payments if you have increased medical expenses.
Cons of Paying Off Your Mortgage Before Retirement
However, there are also some potential drawbacks to paying off your mortgage early:
Lost Investment Returns
Money used to pay off your mortgage could potentially earn higher returns if invested elsewhere, especially if your mortgage rate is low. You lose this earning potential when you prepay your loan.
Less Cash On Hand
Putting all your extra funds toward your mortgage leaves you with less liquidity. This can be risky in case you have an emergency and need ready access to cash.
Less Retirement Savings
If mortgage prepayment compromises your ability to sufficiently fund retirement accounts like 401(k)s and IRAs, it may not be the wisest financial move. Catching up on retirement savings is usually more advantageous.
Recasting/Refinancing Possible
Depending on your loan terms, you may be able to recast or refinance your mortgage to lower your payments or rate while still maintaining your overall balance. This can free up monthly cash flow without tying up your funds in home equity.
Ongoing Housing Costs
Remember that property taxes, insurance, maintenance, and other ownership costs continue even once your mortgage is paid off. Don’t drastically compromise your cash reserves and ability to cover these expenses.
Key Factors to Consider
When deciding whether to pay off your mortgage before retirement, be sure to take the following key factors into account:
-
Your age and proximity to retirement – The closer you are to retirement, the more sense it may make to pay off your mortgage and enter your later years with reduced expenses. If retirement is still far off, prioritize retirement savings first.
-
Your mortgage interest rate – The lower your rate, the less incentive there is to prepay your loan, since your funds may earn higher returns if invested elsewhere. A higher rate supports prepayment.
-
Your risk tolerance – If market volatility makes you uncomfortable, the “guaranteed return” of mortgage interest savings may be preferable to investment risk. Those more comfortable with risk may want to keep investing.
-
Your retirement savings – Inadequate retirement savings should be addressed first before prepaying your mortgage. Work on maximizing contributions to tax-advantaged retirement accounts before putting extra funds toward your mortgage.
-
Your other debt – It usually makes sense to pay off high-interest credit card balances before making extra mortgage payments. Also consider if you may need to take on additional debt in retirement, such as a HELOC.
-
Your health and medical costs – If you anticipate high health care expenses in retirement, having a paid off house provides protection and flexibility. Unexpected medical costs can quickly derail finances.
-
Your spouse’s financial needs – Consider your spouse’s financial situation and retirement timeline, not just your own. Ensure their needs and goals are factored into any mortgage payoff decision.
Alternative Options
Here are some alternatives to weigh if you aren’t able to fully pay off your mortgage right away but still want to reduce your costs:
-
Make extra principal payments – Most loans allow you to pay additional amounts toward your principal each month or in a lump sum when possible. This incrementally shortens your loan term and reduces interest paid.
-
Recast/refinance your mortgage – Refinancing could allow you to obtain a lower interest rate and reduce your payments. Recasting readjusts your principal after a large paydown to lower your payments while keeping the same rate and term.
-
Downsize your home – Relocating to a smaller, less expensive home can significantly reduce your housing costs, freeing up cash flow for retirement. Just factor in moving and transaction costs.
-
Delay retirement – Pushing back your retirement date by even a year or two can allow more time to pay off your mortgage or boost retirement savings. This may be preferable to carrying mortgage debt into retirement.
-
Get a reverse mortgage – For some retirees, a reverse mortgage that lets you access your home equity without selling can provide funds to eliminate mortgage debt. But these complex products have risks to understand.
The Bottom Line
- There’s no single right answer on whether to pay off your mortgage before retirement.
- Base your decision on a careful review of your overall financial picture and retirement plan.
- Factoring your risk tolerance, goals, and need for liquidity and stability is key.
- Discuss options with a financial advisor to determine the most prudent approach for your situation.
- If carrying mortgage debt in retirement will cause undo anxiety, payoff may be the best path forward regardless of other factors.
- But if adequate retirement savings is your chief concern, direct extra funds to investment accounts before making additional mortgage payments.
Deciding if and how to pay off your mortgage as retirement nears is a major decision. But taking the time to weigh all the angles and analyze the tradeoffs can help provide peace of mind that you are making the optimal choice for your needs. With smart planning, you can enter your retirement years with a financial strategy that supports the lifestyle you want.
When you may not want to pay off your mortgage early
You might question whether itâs smart to pay off a house before retirement. Everyone has their own unique financial goals and money management style. There are some scenarios when retirees may want to hang on to their mortgages. This could include:
- You havenât maxed out your retirement savings for the year: 401(k)s and traditional IRAs allow your money to grow on a tax-deferred basis. You can also secure tax-deductible contributions during your working years. Roth IRAs have benefits of their own and generally allow for tax-free withdrawals in retirement. These tax-advantaged accounts are often essential to creating steady retirement income.
- Youâre eligible to make catch-up contributions. If youâre 50 or older, you can put extra funds into a 401(k) or IRA. Those who are 55 or older can also make catch-up contributions to a health savings account (HSA).
- Making extra mortgage payments would deplete your cash savings: A strong emergency fund goes hand in hand with financial wellness. It can help you take advantage of an opportunity and get you through an emergency. Many financial advisors suggest setting aside three to six monthsâ worth of expenses in a high-yield savings accountâand more in retirement.
- Youâll need to cash out your retirement funds to pay off your mortgage: Taking money out of the market can rob you of future investment returns. Youâre also dipping into your nest egg, which is meant to provide income when youâre no longer working.
- Your mortgage rate is lower than the returns youâd get with a low-risk investment: Letâs say your home loan has an interest rate of 3.15 percent. Instead of making extra mortgage payments, you might put that money into a low-risk investment, such as a certificate of deposit (CD) that pays 4.5 percent. While it may be possible to get stronger returns with higher-risk investments, itâs often advised to dial down risk as you approach retirement.
- You have higher-interest debt: If you have credit card balances, a car loan or any other high-interest debt, those costs can add up quickly. Putting them first will likely make better financial sense.
Pros and cons of paying off a mortgage before retirement
Getting rid of your mortgage before your golden years has its benefits and drawbacks. Consider the following before deciding whatâs best for you.
Should You Pay Off Your Mortgage Before Retirement
FAQ
What does Suze Orman say about paying off your house?
While the possibility of job loss can trigger financial panic, Orman advises against rushing to drain your savings to pay off your mortgage early. Even if you have enough money saved to wipe out your mortgage, don’t pull the emergency cord until absolutely necessary.
At what age should you have your home paid off?
There is no specific age to pay off your mortgage, but a common rule of thumb is to be debt-free by your early to mid-60s. It may make sense to do so if you’re retiring within the next few years and have the cash to pay off your mortgage, particularly if your money is in a low-interest savings account.
What three things should be paid off before retirement?
This includes all types of consumer debt, including credit cards, student loans, auto loans, mortgages and even home equity lines of credit (HELOCs). Paying off debt is often easier said than done. But the good news is you don’t have to wait until retirement to become debt-free.