Should You Pay Off Your Mortgage Before You Retire?
March 18, 2015 | Your Finances
Should you pay off your mortgage early? It’s a question I get a lot, especially from people who are getting close to retirement. I’m not surprised: Who doesn’t dream of the day when they own their house free and clear?
While retiring debt free used to be the goal for many American homeowners, times have changed. Today, the number of people who are carrying a mortgage into their golden years is on the rise. Is that a bad thing? Not necessarily.
Let’s look at four good reasons not to pay off your mortgage at retirement—and one good reason why you might want to pay it off anyway.
The first reason not to pay off your mortgage early is if it enables you to maximize your retirement plan contributions and take full advantage of any available company match. The years leading up to retirement represent an important chance to stash away money in tax-advantaged accounts—including making any catch-up contributions if you are age 50 or older. Contributing enough to capture any employer match will help boost your savings even further. Where else are you going to get an immediate 50 percent return on your money, guaranteed? (This assumes your employer matches half of every dollar you contribute to the plan.)
The second reason to hold onto your mortgage is that there may be better uses for your money, at least for now. Given today’s low interest rate environment, it may not make sense to make extra payments on your mortgage if you can pay down higher interest rate debt you may have or if you can earn a higher after-tax return on your money.
The third reason to keep your mortgage is if it provides a tax advantage. You can usually deduct the interest you pay on a mortgage for your main home if you itemize deductions on your tax return. Generally, mortgage interest payments will reduce your taxable income and, thus, the federal income taxes you owe. But keep in mind, if you take the standard deduction instead (typically because you don’t have enough deductions to itemize), there’s no tax benefit to the mortgage interest you pay. Of course, you’ll want to consult with your tax professional for guidance on your specific situation.
And the fourth reason not to pay off your mortgage? You may want the liquidity to meet other needs, including emergencies, general expenses and discretionary spending. Using a large chunk of your savings to pay off your mortgage can be a good idea but not if it leaves you “house-rich and cash-poor.” Money tied up in your house may not be as easily accessible to pay unforeseen medical costs or other expenses in retirement. You’d need to borrow against your home using a home equity line of credit, reverse mortgage or sale of the property.
So when would you want to pay off your mortgage before retirement? Here’s one good reason to pay it off early.
For many people, paying off their mortgage has less to do with math and more to do with peace of mind. Ask people who have paid off their mortgage, and they’ll tell you it feels great. That, and the fact that eliminating what for many is their largest monthly expense gives them more control over their cash flow in retirement, including the ability to dial spending up or down to meet their needs and wants over time.
That doesn’t mean paying off your mortgage is a slam-dunk—there are more things to consider than I’ve covered here. For this reason, it often makes sense to speak with a financial professional who can help review your options and provide an objective view of whether it makes financial and emotional sense to carry your loan into retirement or pay it off early.