Should You Pay Off Your Mortgage Before Retirement?

Owning a home can lead to a comfortable retirement. In theory, you buy a house when you’re 30, faithfully make the mortgage payments for 30 years and at age 60 you own your house, free and clear. Now you have a solid nest egg and can sail into a worry-free retirement.

But more often, here’s how it works in practice. You move from a starter home to a bigger house, with a bigger mortgage. You refinance to get a lower interest rate and take out some money in the process. And at age 60 you’re still paying a mortgage.

[See: 10 Ways to Reduce Your Housing Costs in Retirement.]

According to the Federal Reserve Board, over a third of homeowners ages 65 to 74 are still burdened with monthly mortgage payments, with an average balance of $118,000. You might have that amount or more in a 401(k) plan. Is it worth it to draw down your retirement savings, and perhaps sell off other investments, to pay off your mortgage? The answer depends on your individual situation. Here’s how to decide whether to pay off your mortgage before retirement:

When to Keep Your Mortgage:

You don’t have enough money. If paying off the mortgage will make you cash poor and unable to cover your bills, then don’t do it. As far as debt goes, a mortgage is about the best loan you can have.

The money is tied up in other investments. Even if you do have the financial resources to pay off your mortgage, it doesn’t make sense if the money is already invested in solid assets that generate income and appreciate over time. Also, if you have large unrealized capital gains and would be hit by a big tax bill, it’s probably not worth it. Remember, money coming out of an IRA or 401(k) is typically subject to personal income tax.

You have other loans. A mortgage carries a lower interest rate than most other loans. So if you’re carrying a credit card balance or have other high interest debt, pay that off first.

You think inflation is coming back. Housing prices rise with inflation. With a mortgage you capture the increase while paying back the loan in ever-cheaper dollars. Also, interest rates typically rise with inflation, but you benefit from a mortgage fixed at a lower rate, at least for a period of time.

You’re still working. Those who are still on the job might be better off building an emergency fund to cover life’s sudden surprises and contributing the maximum amount to an IRA, 401(k) or other retirement account.

[See: 10 Tips for Finding a Great Place to Retire.]

When to Pay Off Your Mortgage:

You have a lot of…

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