Should You Pay Off Your Mortgage Before Retirement?
In the past, it was not uncommon for homeowners to buy a house around the age of 30 and have paid it off in full by the age of 60, hence the 30-year term for mortgages that has become the industry standard. But the Federal Reserve Board has found that more than a third of today’s homeowners aged 65-74 are still making mortgage payments even as they are facing down the inevitability of retirement.
This fact poses a somewhat daunting question if you plan to retire but may do so with a balance left on your mortgage: Should you cash in your investments to pay off your mortgage before retiring? The answer can vary greatly depending on your situation, but considering a few questions honestly beforehand can help you to make the correct decision.
How important is it to you to be debt-free?
Peace of mind is a priceless asset, and not having to worry about lingering debt when you are living on a fixed or limited income can offer a valuable sense of confidence. Paying off your mortgage before retirement can be akin to making a risk-free investment. Not only because eliminating that debt provides a sense of relief, but because you are saving money that would otherwise go to pay interest over the remaining life of the loan.
Depending on the amount you have left on your mortgage and your interest rate, you could potentially save thousands in the long run by paying off your debt early. This would theoretically help you pay for other home-related expenses down the line, including property tax, repairs and upgrades. If you have paid off a significant portion of your principal, however, you may simply be better off saving your money and letting it accrue interest while steadily paying down the remainder of your mortgage.
How do your retirement savings look?
If you are dissatisfied with the amount that you have saved for retirement, it might not make sense to pay off a mortgage. Instead, you should take full advantage of building your retirement savings while you are able, as the tax-advantaged status of these savings would be far more beneficial in the long run than paying off a large debt to save interest.
It may be a wise decision to forego some extra savings to pay off a higher-interest debt like a credit card, but given that mortgages tend to carry lower rates of interest, you may be better putting that money in a high-yield savings or money market account than wiping out your debt.
It’s also worth noting that once you have paid off that debt, that money is gone. By saving that money instead, you’ll have it available for potential emergency situations while accruing interest on the principal that remains in your account.
Ultimately, the decision to pay off your mortgage early is not one that should be taken lightly or done alone. Consult with your family on the decision and reach out to a trusted financial advisor for a professional opinion on your options.