Should I Pay Off My Mortgage Before I Retire?


Answer for "Should I pay off my mortgage before I retire?"

Richard Keri real estate agent
  RE/MAX Diamond, Realtors

We all aim for a debt-free retirement that comes with the peace of mind of no longer making payments. Mortgage payments are included there, and retiring with further payment required on your mortgage might not be the most comforting thought. The topic isn’t as easy as you have to consider several things. Depending on your interest rates, the balance on your mortgage, and other potential avenues you could take with your extra money, you might decide against it. Investing can be a profitable venture, but it depends on the guaranteed investment percentage return. When it comes to choosing your 401(k) investments, there is a certain stability depending on what type of investment you choose.

Reducing your debt before retirement, however, is very tempting, especially if you can manage it. Increasing your profit is tempting as well. To help you weigh the options that best apply to your personal situation, we’ll analyze the pros and cons of paying off your mortgage before retirement.

Pros of Paying off your Mortgage

  • Your income will be limited: Deciding to refinance your mortgage and increase your monthly mortgage payments will limit your income. However, once the mortgage is paid off and you reach retirement age, your financial situation will be more relaxed as your monthly expenses will be reduced.
  • Saving interest: While paying off your mortgage will lead to you losing your interest tax deduction, the amount of money saved on interest can be substantial. This depends on your mortgage’s size and term, but interest saving can help you save a lot of money over the long haul. The closer you get to paying off your mortgage, the more extensive your principal coverage will be. The result will be a lower deductible interest that won’t make a big difference in the long haul.
  • Expected return: While investments are volatile, no longer paying interest is like a risk-free return equal to your mortgage interest rate. The interest rate amount you would have paid monthly is a certain return while investing isn’t as secure. Relative confidence in earning a rate of return from investments isn’t equivalent to the certainty that you will earn that rate.
  • Serenity: If you decide to pay off your mortgage, there are additional funds that you can access, like your 401(k) plan or IRA. However, if these encounter withdrawals before a certain age, the income tax will be charged together with a penalty. The drawback to this is the offset of potential interest savings. 

Cons of Paying off your Mortgage

  • Limited retirement saving: Contributing to your 401(k) or other retirement accounts is essential for your retirement. Failing to do so can limit your possibilities by losing the chance of increasing your return through these accounts that are tax-deferred until you withdraw.
  • Limited cash reserves: If possible, try to maintain a cash reserve that would allow you to pay six months’ worth of living expenses. Using this cash reserve to pay off your mortgage might wind with you being house rich but cash poor. Although you will have your home equity to fall back on in case you need it and a home equity loan is an option as well.
  • High-interest debt: Because mortgages are deductible debt before you pay it off, you should make sure that any other non-deductible debts that tend to have a higher interest rate have been paid. 
  • The cost of opportunities: Along with the risk related to investments come the costs associated with the opportunities. If your monthly mortgage payment is less than what you might reasonably earn, investments might be reconsidered.

The In-Between Scenario

The in-between option that limits the amount of monthly payments required for your mortgage without losing diversification and liquidity is to chip away the principal. While you continue to meet the monthly mortgage payments, you could make an extra principal payment every month. This will decrease the interest rate and the time-span of the loan. However, being too aggressive can affect your savings and spending habits, so be wary of this.

Taking into account current interest rates, you could look into refinancing your mortgage depending on the type of loan you have. If current interest rates are lower than what your contract has stipulated, it might decrease your monthly payments and make it easier for you to pay them off entirely in time.

Deciding whether you should invest in your 401(k) or pay off your home isn’t easy, but we hope this pros and cons list will help you out. It is a big choice to make after all, and you have to make an informed decision considering your financial endeavors based on what you want your retirement to look like.

 

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