Fewer Americans are paying off their mortgages before they retire. A Fannie Mae study found that less than 50% of homeowners age 65 to 69 were mortgage-free in 2015, down 10 percentage points from 2000. Despite this shift, you’ll probably come out ahead by eliminating your mortgage before you stop working. For starters, you’ll have a bigger cushion for other expenses that often are harder to predict, such as health care.
It’s a good idea if …
With your mortgage gone, you probably can reduce the amount you pull from your retirement accounts each month to cover living expenses. That’s a benefit when financial markets decline, because you won’t need to sell as many investments that have dropped in value.
In addition, there’s the psychological benefit of knowing you’re free of this expense. If you’re like many people, your mortgage is your largest monthly bill.
What about itemizing …
One of the reasons often given for hanging onto a mortgage is the ability to deduct interest payments from your taxable income. But the 2017 Tax Cuts and Jobs Act nearly doubled the standard deduction to $12,000 for single filers and $24,000 for joint filers. Even with a mortgage, you might not have enough total deductions to make itemizing worthwhile.
Some argue you can use the money you would put toward your mortgage to make other investments that may earn a higher return. But because almost all investments fluctuate in value, paying off your mortgage is likely to offer a more risk-free return.
It doesn’t make sense when …
Although entering retirement mortgage-free can be a sensible move for many people, it’s not right for everyone. If you have credit card or other debt that carries a higher interest rate, you’ll want to whittle down those balances first. If you haven’t adequately funded your retirement accounts, you should do everything you can to boost those savings.
Also, liquidating a large portion of your investments to pay off your mortgage might leave you “house poor” — with much of your wealth tied to your home and not easily accessible in an emergency.
And there might be penalties …
Before paying off your mortgage, check to ensure there’s no prepayment penalty. The Dodd-Frank Act of 2010 limited lenders’ ability to impose penalties on many mortgages, but it still makes sense to confirm this. Also check that your lender will apply the extra payments to your principal, rather than to interest. This will help you pay off your mortgage as quickly as possible.
Still unsure whether paying off your mortgage makes sense? Your accounting professional can offer guidance