Should You Pay off Your Mortgage When You Retire?

Two people thinking about paying off their mortgage when they retire

Evaluating your financial portfolio and retirement strategy is the key to determining if you should pay off your mortgage entirely or keep making payments on it after you retire. Here are eight questions to consider before deciding what to do.  

1. Are You Carrying High-Interest Debt?

Before deciding to pay off your mortgage, evaluate your debt. If you have credit card debt or other loans at a high-interest rate, it is likely a better decision in the long term to pay those debts first, especially if your mortgage carries a lower interest rate. Any extra cash liquidity should pay high-balance, high-interest obligations first. Paying off your mortgage doesn’t make sense if your student loans and multiple credit cards carry large balances with a higher interest rate.

2. Do You Benefit from the Tax Deduction?

How much of a tax deduction do you get for your current mortgage payments? Generally, people with newer mortgages pay more toward interest and qualify for a larger tax deduction. If you are still paying enough interest to claim a significant deduction, it’s worth doing some calculations to decide if the deduction makes keeping the mortgage worthwhile.

3. What Funds Would You Use to Pay off Your Mortgage?

If you have plenty of cash on hand (or a sudden windfall) and don’t need to tap into retirement savings to pay off your mortgage, it seems reasonable not to carry this loan into retirement. However, this may not be a sound move if you plan to use your retirement savings to pay off your mortgage. Paying it off will add to the equity in the home, but you won’t have easy access to it for living expenses or unexpected emergencies.

4. Do Other Investments Offer a Higher Rate of Return? 

Instead of putting all your available cash into your home, it may make sense to invest in a product that offers a higher return. This, of course, is contingent on the investment’s rate of return compared to the interest you’re paying on your mortgage. If the rate of return on the investment is higher, dedicating all of your cash toward a lower-interest mortgage loan is likely not the wisest long-term financial strategy.

5. Do You Have Enough Liquidity for Unanticipated Expenses?

Retirement can bring surprises, and you must evaluate whether you have enough cash flow for emergencies, like medical or other unforeseen expenses. Paying off your mortgage doesn’t make sense, if it means putting all of your emergency funds into your house.

6. Is There Substantial Equity In Your Home?

If you’re near retirement age, chances are you’ve built up substantial equity in your home. If that is the case, there are ways to leverage that equity. One way is a reverse mortgage. A reverse mortgage allows you to tap your equity and stay in your home without making mortgage payments. You can use the loan proceeds from a reverse in any way you want, whether funding a vacation, investments, or a grandchild’s college education.

Deciding whether or not you should pay off your mortgage in retirement is not a simple decision. As with all major financial decisions, it’s best to consult with an independent financial advisor to ensure you’re best utilizing your assets.

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