Should You Pay Off Your Mortgage Before Retirement?

You might assume that paying off your mortgage means financial liberation, but for some people, it’s actually better to avoid paying off their mortgage before the final due date. But if you’re tired of making monthly mortgage payments, the thought of owning your home without debt may be the ultimate pre-retirement dream.

For some households, it’s better to keep extra cash on hand and make just the minimum monthly payment. For others, paying extra, including lump sums or a little extra each month, could be the best strategy. Here’s a closer look at the pros and cons of paying off your mortgage before retirement.

When Should You Pay Off Your Mortgage?

Settling your mortgage early could be a smart move for your future if: 

1. You Have No Higher-Interest Debt

Prioritizing debt repayment is key to effectively tackling your mortgage. High-interest debts, such as credit cards and personal loans, typically consume a significant portion of your monthly cash flow through minimum payments. By eliminating these debts first, you free up that cash flow entirely. This allows you to focus solely on paying down your mortgage (or building your savings or investments), rather than spreading your income across multiple payments.

2. Your Retirement Savings Are Already Strong

Once you’ve built up your retirement savings and you can comfortably retire on what you have already, you may find it makes sense to make an extra effort to pay off your mortgage. Doing so gives you more disposable income every month in retirement, which can be welcome on a fixed income. 

3. Your Monthly Mortgage Payment Strains Your Future Budget

When you look ahead and realize your retirement income may not comfortably cover your mortgage payment, paying it off early can make life a lot easier. A mortgage that feels manageable now might feel burdensome later. Paying off the mortgage before you retire gives you one less big expense to worry about.

4. You Want Guaranteed Peace of Mind With Lower Monthly Expenses

Financial peace of mind is the top priority for some, and if that’s your goal, then a mortgage payoff may be a good option. Having one fewer large bill to worry about can create some space and breathing room. Even simple steps to lower your utility bills can be beneficial, and having a mortgage-free home to pair with that can be a powerful emotional lift.

5. Your Interest Rate Is Higher Than What Your Investments Earn

If your mortgage interest rate is higher than the rate or return you are earning on your savings and investments, you should seriously consider paying off your mortgage early.

• Paying off a high-interest mortgage is equivalent to earning a guaranteed, risk-free return on your money equal to your mortgage rate.
• This “guaranteed return” often outweighs the market’s uncertain, fluctuating returns, making it an instant and beneficial financial move.

As with any debt, a higher interest rate means you’re paying more for every dollar you borrow. It’s usually best to focus on paying higher-interest debts first, then move on to lower-interest debts.

When Keeping Your Mortgage Is the Better Choice 

Holding onto your mortgage can work in your favor if: 

1. The Interest Rate Is Low

When the interest rate on your mortgage is particularly low, it’s financially advisable to hold onto the mortgage rather than pay it off early. A low-interest rate means you’re paying relatively little to borrow that money, and the return you can get from investing that money elsewhere may be higher than your interest rate. 

In other words, if you have a low-rate mortgage, you’re getting a very inexpensive long-term loan. The advantage is that you can let your money work for you while the low-rate mortgage builds equity with each payment.

Even if your interest rate isn’t extremely low, if your mortgage rate is still lower than your expected investment earnings, you may still want to keep your mortgage and use the cash to increase your investments. If you have been regularly earning a higher rate of return than your mortgage interest rate, it may be a good idea to continue that strategy.

2. Retirement Savings Are Not Yet Fully Funded

If your retirement savings are not yet robust, it is generally best to prioritize funding your retirement accounts over paying off your mortgage early. With enough retirement savings, you should be able to cover your mortgage in retirement if needed. But without sufficient savings, you may not be able to afford to retire at all.

3. You Want To Maintain Liquidity for Emergencies or Opportunities

Keeping the mortgage provides liquidity, as you have that extra cash in the bank or investments rather than locked into your home equity. An emergency or opportunity may present itself at some time during your life, and you may need the cash. Whether it’s an emergency, travel, medical expenses, or an investment opportunity, having that liquidity will help you sleep better at night. It also means that you have a buffer in case of an unexpected income drop.

4. You Prefer the Tax Advantages From Mortgage Interest Deductions

The IRS allows homeowners to deduct mortgage interest from their taxable income if they itemize deductions. 

Since the 2017 tax changes (Tax Cuts and Jobs Act), the standard deduction has been significantly increased. For many taxpayers, the standard deduction is now much higher than the total of their itemized deductions (including property taxes and mortgage interest).

If your total itemized deductions exceed the standard deduction amount, the mortgage interest reduces your taxable income, effectively lowering the net cost of borrowing. This deduction can make keeping a mortgage more financially appealing than paying it off.

Should I Pay Off My Mortgage Early?

Is it better to pay off your mortgage before retirement? There’s no universal answer. Personal finances are personal, after all. It depends on your savings, other sources of income, interest rates, and your financial goals and preferences.

You may prefer the security of a mortgage-free retirement, or want to earn more by maintaining your mortgage and investing the money instead. Analyze your finances and consider your retirement goals to determine the best option for you. It may also be helpful to talk to a financial advisor to explore your options further.