Should You Use Retirement Funds to Pay Off a Mortgage?

Q: I recently lost my job at age 60. Should I pay off my $95,000 mortgage with my 403(b) plan? It seems over the long haul I would save a lot of money. I will be going back to work part time in the near future.

–Carol, 61, Greenville, S.C.
 
A: Despite the allure of being mortgage free, I would recommend against using the money in your 403(b), a retirement account for non-profit workers that's similar to a 401(k), to pay off your mortgage in one fell swoop. Withdrawals from 403(b) and other retirement savings plans are almost always fully taxable.

Depending on your income tax bracket that means you'll need to withdraw around $130,000 from your 403(b) account in order to have enough money left over after taxes are paid to retire your $95,000 mortgage. That's a steep price to eliminate monthly payments to your home lender.

On the other hand, you don't want to spend a long time paying off your mortgage, particularly after you finally retire. Instead, you should consider making extra payments against your mortgage over the next several years while you'll have part-time income. You'll also benefit from tax deductions on the mortgage interest you pay.

As I've written before, extra mortgage payments can add up fast. Let's say that you have 20 years left on a $250,000, 30-year mortgage with an interest rate of 5.5 percent. Your principal and interest payment would be about $1,420 per month. By paying an extra $200 a month, the mortgage would be paid in full in 16 years instead of 20. An extra $400 a month would speed up the payoff time to 13.5 years.

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