Your interest rates and the source of the funds you would need to complete the task determine the best response for you. Here are some scenarios to help work it out.
It’s a Tuesday afternoon, and you tune in to The Ramsey Show as you sit in gridlocked traffic. Dave Ramsey is constantly discussing the best ways to reduce debt and the reasons it’s so important to be debt-free. Two factors are in your favor: (1) you have the funds to carry out that exact task; and (2) you will be retiring at the end of the month, meaning you will only have to endure rush-hour traffic for a few weeks longer.
When you begin researching mortgage payoff the following day, you find Ric Edelman, the creator of one of the biggest personal finance companies in the nation. He maintains that you should stretch out a large mortgage for as long as possible, which is the exact opposite of what Dave Ramsey suggests.
I’m guessing this leaves you a bit confused. The truth is that personal finance is just that: personal. The right answer for you won’t come from someone speaking to a million people and giving one answer.
Here are some factors to consider when deciding whether or not to pay off your mortgage in retirement:
- Your interest rate: If your mortgage interest rate is low, it may not make sense to pay it off early. The money you would use to pay off the mortgage could be invested and potentially earn a higher return than the interest rate on your mortgage.
- Your retirement savings: If you have a large amount of retirement savings, you may be able to afford to pay off your mortgage without jeopardizing your financial security. However, if your retirement savings are limited, you may want to keep your mortgage payments as low as possible.
- Your tax situation: If you are in a high tax bracket, you may be able to save money on taxes by paying off your mortgage. This is because the interest you pay on your mortgage is tax-deductible.
- Your risk tolerance: If you are risk-averse, you may prefer to pay off your mortgage and have the peace of mind of knowing that you are debt-free. However, if you are comfortable with taking on some risk, you may want to invest your money instead of paying off your mortgage.
Here are some additional things to keep in mind:
- If you are considering paying off your mortgage, it is important to talk to a financial advisor to get personalized advice.
- There are a number of different ways to pay off your mortgage early. You can make extra payments on your mortgage each month, or you can make a lump sum payment.
- If you decide to pay off your mortgage early, be sure to factor in the prepayment penalty, if there is one.
Whether or not to pay off your mortgage in retirement is ultimately a personal choice. There is no right or wrong response; rather, the best course of action for you will depend on your unique situation.
Here are some additional resources that you may find helpful:
- Kiplinger: https://www.kiplinger.com/retirement/604813/im-retired-should-i-pay-off-my-mortgage
- Charles Schwab: https://www.schwab.com/learn/story/should-you-pay-off-mortgage-before-you-retire
- NerdWallet: https://www.nerdwallet.com/article/mortgages/should-i-pay-off-my-mortgage-early
- Bankrate: https://www.bankrate.com/mortgages/should-i-pay-off-my-mortgage-early/
Here are some additional thoughts on the topic:
- Paying off your mortgage can give you peace of mind and free up some of your monthly cash flow.
- However, it is important to weigh the pros and cons carefully before making a decision.
- If you are considering paying off your mortgage, be sure to talk to a financial advisor to get personalized advice.
You have the money in cash because you are scared of the market.
Should you pay your mortgage off?
- Pay off your bank debt if the interest rate on it is lower than the mortgage interest rate.
- Keep your mortgage for the time being if your bank’s interest rate is higher than your mortgage’s.
Why? There is a term we use in this profession: arbitrage. Applied in this context, you have negative arbitrage if you have stuck with your big bank over the last year. For example, as of Aug. 2, 2023, Truist still pays exactly 0% interest on checking accounts. If the bank is paying you 0% on your checking account and charging you 4% on your mortgage, you are losing 4% every year you hang on to that loan. This is oversimplifying, of course, but you get the idea.
Let’s say you have moved your cash around in the last year. The Schwab money market fund you have pays 5%. In this situation, given the same 4% mortgage, you have positive arbitrage. You earn 1% every year you hang on to the loan.
Redfin reports that as of June 202023, 26.22% of homeowners had a rate below 4 percent, meaning the advice above is applicable. Nevertheless, if you are purchasing a home with a new mortgage, you will probably have to pay interest at a rate of about 7%.
What’s the downside? First and foremost, you are losing liquidity. You are essentially depositing money into a piggy bank when you pay off a mortgage because you cannot take it out unless you sell the house or use your home equity.
Second is the tax consideration. When you pay off your mortgage, you won’t have any mortgage interest to deduct, which could cause you to fall below the standard deduction threshold. This could raise your effective tax rate, but likely not significantly. Last, but especially relevant today, holding a loan is an inflation hedge. A fixed-rate loan means that your principal and interest payments are fixed, so your housing costs will probably rise far more slowly than the CPI-W.
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This article will help you identify which of three groups best fits your situation if you are retired or almost retired and have enough money to pay off your mortgage.
Should You Pay Off Your Mortgage Before Retirement
FAQ
When retirees should not pay off their mortgages?
Is it better to retire with or without a mortgage?
At what age do most people pay off their house?
Should a retiree pay off a mortgage?
Paying off a mortgage can be smart for retirees or those just about to retire if they’re in a lower-income bracket, have a high-interest mortgage, or don’t benefit from the mortgage interest tax deduction. It’s generally not a good idea to withdraw from a retirement account to pay off a mortgage. That could reduce your retirement income too much.
Should I keep my mortgage in retirement?
Sometimes it makes sense to keep your mortgage in retirement, sometimes it doesn’t. Find out what strategy works best for you. Pay Off That Mortgage Before You Retire Consider paying off the debt with the highest interest rate first.
Can you retire without monthly mortgage payments?
Entering your retirement years without monthly mortgage payments means you won’t have to use your retirement funds to pay for them. Generally, it’s not a good idea to withdraw from a retirement plan such as an individual retirement account (IRA) or 401 (k) to pay off a mortgage.
Should you pay down a mortgage or save for retirement?
Since individual circumstances vary widely, there’s no one answer as to whether it’s better to pay down a mortgage or to save for retirement. In each case, you have to run your own numbers. Overall, however, don’t sacrifice the long-term savings goals of your retirement plan by focusing too much on your mortgage.