Planning and saving for retirement is a big undertaking with a significant amount of uncertainty. There are a lot of questions as you approach retirement, and one that comes up regularly is “should I pay off my mortgage before I retire?”
Unfortunately, there’s no easy answer. Instead, here are some considerations as you weigh your options and make the best choice for your situation.
You Should Not Pay Off Your Mortgage Early If:
- You haven’t maxed out your retirement accounts. If you can still contribute to your 401(k), IRA or other retirement accounts, focus your financial effort there. The money in these accounts can grow without taxes on earnings until you withdraw it. Read the savings milestones you shouldn’t miss.
- You carry other debt. If you have higher-interest debt, pay that down. Prioritize tackling credit card balances or loans of any type where the interest rate exceeds that of your mortgage.
- If you’re low on cash (think: less than six months’ worth of emergency expenses), the blow of paying off your mortgage could make retiring risky.
- You’re losing tax deductions. The interest you pay on your mortgage is tax deductible. Do some digging to determine how much eliminating that write-off will impact your tax bracket and annual burden.
- You have a move on the horizon. If you’re considering moving or downsizing during retirement, keep the mortgage. You may be able to finance your next home without touching your savings.
You May Want to Pay Off Your Mortgage Before Retirement If:
- You’re getting by on less. Your mortgage is likely your biggest monthly expense in retirement. Getting rid of this payment means a much lower overhead cost each month.
- You can ditch the interest. There’s no two ways about it — you’re likely paying tens of thousands of dollars in interest over the life of your mortgage. Paying off your mortgage early means less money going to interest – that’s money freed up for other uses.
- You’ll have more peace of mind. You may sleep easier entering retirement debt-free. Factor that in alongside financial considerations. If you plan to stay in your home, paying off the mortgage represents security. Even if you lose your job early, the markets fall or tax rates increase, you’ll have a roof over your head.
Ready to Pay It Off? Here’s How to Game Plan:
Get on a Schedule
If time is on your side (read: you’re still a few years out from retirement), consult your loan provider and ask for a schedule to pay off your mortgage before you plan to retire. Online calculators can also show you how to make extra monthly or annual payments to pay off the loan by a certain time.
Use the Right Money
Cashing out funds that could be earning you money for the future isn’t wise. Instead, look to savings that isn’t actively working for you. If your emergency fund is all set, put any excess toward your mortgage. Otherwise, cash out your lowest interest-producing options. Check the rates of your lower-earning money and prioritize using that first.
Rethink Your Retirement Contributions
If you’re dedicated to paying off your mortgage early, consider contributing to your retirement accounts only up to the maximum match value — especially if you may need to dip into those accounts to wipe out your mortgage in the future.
Keeping a Mortgage in Retirement: Other Options
Depending on prevailing mortgage interest rates, it may make sense to refinance into a shorter-term loan if your goal is to pay off your mortgage more quickly. You may want to refinance into a loan with a lower interest rate if you want to decrease your monthly payment to free up funds for your savings. Keep in mind that it doesn’t have to be an all-or-nothing goal — if your mortgage doesn’t have a prepayment penalty, you could potentially pay off a portion of it and shorten the length of your loan. Beware, however, that refinancing your mortgage comes with additional financial considerations.