Should You Pay Off Your Mortgage Before Retirement?

The reason is that with a low-rate loan, you could stash your extra cash in a relatively safe place, such as a high-yield savings account or a certificate of deposit (CD), where you’d earn more interest than what you’re paying for your mortgage.

“Some savings options like CDs or money market accounts are currently earning closer to 4 percent,” says Chad Gammon, a certified financial planner at Custom Fit Financial in Cedar Rapids, Iowa. “If your mortgage rate is around 3 percent, it might not make sense to pay it off early.”

But, he adds, “if you have a newer mortgage with a rate closer to 6 or 7 percent, putting extra money toward your mortgage can be a smart move, since it’s harder to find low-risk investments that pay that much.”

Another thing to consider: Mortgage interest is tax-deductible, which means you’ll claw some of that money back from Uncle Sam — a tax break you’d lose if you paid off your home loan.

Will prepaying your mortgage deplete your emergency fund?

Another potential trade-off to wiping out your mortgage before retirement is that once you funnel that money into your house, it’s not easy to get it back out. This loss of liquidity can become a problem if your monthly cash flow in retirement (from Social Security, retirement savings, pensions and other sources) doesn’t cover your living expenses. 

Plus, by the time you retire, funds you set aside for curveballs, such as sudden health expenses or a leaky roof, should be bulked up to provide a bigger buffer than what you had during your working years.

“Typically, I tell working clients that six to 12 months of cash reserves is optimal,” says Kevin Leibowitz, a mortgage broker and CEO of Grayton Mortgage in New York City. “For retirees, I would say that needs to be larger — 12 to 24 months.”

Think you can pay off your mortgage and just tap into your home equity if you need it? That might be tougher than you think. 

“In retirement, it’s harder to qualify for a HELOC [home equity line of credit] or a home equity loan without a steady income,” warns Weiss. “And while reverse mortgages are an option, they often come with high costs and complexity.”

Even if you qualify for a HELOC in retirement, you might not want to take it, since rates for these loan products tend to be higher than for a mortgage. And if you’re retired, banks may see your limited income as a risk they need to mitigate by raising your interest rate. 

Pahmela Foxley, vice president of mortgage lending at Wasatch Peaks Credit Union in South Ogden, Utah, suggests that if you pay off your mortgage, “open a small HELOC before you retire. That way, the loan is qualified on your current income and not your retirement income.” ​

What money are you using — and where else could it go?

Where you’re getting the funds to pay off your mortgage matters, because there are a few sources you may want to avoid.

“Some retirees liquidate pretax retirement accounts to pay off their mortgage, not realizing the tax consequences,” says Ford. “If you withdraw from an IRA or 401(k), this can lead to a spike in taxable income.” It might also put you in a higher tax bracket and expose you to a Medicare premium surcharge assessed to people with higher incomes. You’ll want to consider where else that money could go if you weren’t pouring it into owning your home outright. 

“People often become single-mindedly focused on paying off their mortgage at the expense of other debts, [like] a $20,000 balance on their credit card,” says Melanie Musson, a financial educator at Quote.com, an online insurance marketplace. “It would be better to pay off the high-interest credit card debt rather than the low-interest mortgage.” The average credit card interest rate was about 20 percent around the end of August, according to Bankrate.

Even if you have no debt aside from what you owe on your house, there could be other worthy places to sock away extra money. Have you maxed out your retirement accounts? Could you bulk up a college savings account for your kids or grandkids?

“If mortgage payments are so large that people can’t adequately fund their retirement account or a college account, then it may be wise to simply pay your mortgage over the normal term of the loan,” says Robert Johnson, a professor of finance at Creighton University and coauthor of The Tools and Techniques of Investment Planning.

What are your mortgage’s prepayment terms?

Before accelerating your mortgage schedule, check the terms of your loan: Some lenders charge a fee if you pay it off early.

These “prepayment penalties are most common if you pay in full within the first three to five years of the loan,” says Jake Falcon, founder and CEO of Falcon Wealth Advisors in Mission Woods, Kansas. “These penalties can range from 1 to 3 percent of the remaining loan balance, or they may be calculated as a set number of months’ worth of interest. For example, if you have a $300,000 mortgage and a 2 percent penalty, you could owe $6,000 just for paying it off early.” 

Not all mortgages penalize for early payment, “but it’s important to read the fine print or ask your lender directly,” says Falcon.

Your tax situation should also be taken into account. “It’s important to know if writing off the interest on the mortgage will help offset other income like capital gains and dividends,” says Frank Davis III, president of New Era Financial in Toms River, New Jersey. “Every situation is different. The right choice depends on your full financial picture.”

Still undecided? “Paying off your mortgage doesn’t have to be all or nothing,” says Gammon. “You might choose to make extra payments here and there or add a little more each month, depending on what your budget allows.”

Even if the math says you’ll likely end up with more money by hanging on to your mortgage, don’t ignore the emotional side of the equation,” he adds. “For some people, the peace of mind that comes with being debt-free makes paying off the mortgage worth it, no matter the numbers.”

Weiss says that’s especially true for retirees: “Most aren’t looking to take big risks with their money. So using extra funds to pay off their home is often seen as a safe ‘investment.’”