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Should You Pay Off Your Mortgage Before Retirement?

With finances and emotions in play, the answer is, it depends

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Entering retirement debt-free is a dream for many, particularly when it comes to paying off their mortgage. Who doesn’t want that burden lifted? But getting in the black from a housing standpoint doesn’t always make sense. In some instances, paying off your mortgage may cost you more than hanging on to the debt. 

Determining what’s right for you requires lots of considerations, including your finances and your emotions. What’s right for one person may be wrong for another. With that in mind, here’s a look at when it makes sense to pay off your mortgage and when it doesn’t. 

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Pay off your mortgage: 

  • If you want to lower your baseline expenses.

Retirement is expensive, and housing is a big part of it. If you have the cash and it’s earning less than your mortgage interest, paying off your loan could be a viable option. Especially if the idea of being charged to borrow money is nagging at you. 

“If you’re looking at a mortgage payment, and there’s still a long time to go on the mortgage and it’s higher than the rate of a relatively risk-free return in the current marketplace, that would be an opportunity to pay it off,” says Maggi Keating, a certified financial planner and senior portfolio manager at FBB Capital Partners. Much of the benefit from the mortgage interest deduction goes away by the end of your mortgage anyway. “If you are paying a couple thousand a month for a mortgage, that would be a nice chunk gone out of cash flow,” she says.  

  • If sleeping well at night is a high priority.

You can’t put a price on peace of mind, especially in retirement. It may not make sense on paper, but if it keeps your mental state intact and you can afford to do it, it may be the right choice. That’s particularly true if you plan to age in place, a growing trend among older adults. According to AARP’s 2021 Home and Community Preferences Survey, about three-quarters of adults 50 and older said they want to stay in their current homes or communities for as long as possible. What’s more, most would be open to sharing their home with a relative other than their spouse (69 percent) or with a friend (54 percent) as they age. To some people, there’s no better feeling than knowing you own your house outright.

Don’t pay off your mortgage: 

  • If you make more money keeping it invested. 

When deciding to pay off your mortgage, you have to consider your interest rate, size of the mortgage, cash flow and investments. Paying off your mortgage may not be the best use of capital, if you can get a better return keeping your money invested and you have enough cash to live on. “You want the money working as smart as possible,” says Kent Pearce, managing director and senior financial adviser with Merrill Lynch Wealth Management. “If a client’s investment portfolio model’s long-term projections exceed the borrowing rate of the mortgage by a fair margin or greater, and the client is comfortable with the risk tolerance and volatility of the portfolio, in a lot of cases they choose to keep the mortgage.” 

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Just because you are retiring doesn’t mean you’ll stop working. Many older adults pursue part-time work, consulting and even new careers once they leave their current jobs. That keeps the money flowing and reduces the need and desire to pay off their mortgage. “It factors into the retirement equation. It factors into cash flow,” Pearce says. “It removes that burden that, ‘Oh my God, I want to get rid of that debt.’ ” 

  • If you don’t have a fall-back plan. 

For lots of people, paying off their mortgage means tapping their retirement savings or investment accounts. If they do that and something happens in retirement, they won’t have a home equity line of credit (HELOC) to draw down on. “If you pay off the house, yes, you don’t have a mortgage. But you also don’t have money sitting in the bank in case you get sick or need to buy a brand-new refrigerator,” says Linda McCoy, president of the National Association of Mortgage Brokers. “Everybody has different fingerprints. Everybody has different scenarios.”

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