Should You Pay Off Your Mortgage Before You Retire?
As independent financial advisors in Houston, TX; Atlanta, GA; and Birmingham, AL, a common question we’re often asked at Linscomb & Williams is, “Should I pay off my mortgage before I retire?” The answer: “It depends.”
Whether you’re planning a retirement in Houston, TX or New York; Atlanta, GA or California, living costs are a major consideration. Paying your mortgage off before you retire can offer many benefits, but it’s not always an attainable goal. And even if it is fully feasible, you should not consider it an "automatic" that paying off a mortgage is the "right" answer. If you do plan to carry your mortgage into retirement, you have options.
Watch our quick video below, and contact us if you’d like to discuss your specific situation in more detail.
Why it Might be a Good Idea to Pay Off Your Mortgage Before Retirement
If you’re in the financial position to pay off your mortgage before you quit working, doing so may be a wise strategy. Here are 3 reasons why:
Being able to live off the money you’ve accumulated during your working years is a beautiful thing. But it can also be stressful as you work to make sure you don’t spend it all too quickly.
Paying off your mortgage means one less bill to worry about in retirement. For some people, the mortgage payment may be the largest monthly bill. With fewer expenses and lower overhead, you have more disposable income to put toward other things, like that dream vacation, life-long hobby, or kitchen renovation you always dreamed of. Fewer recurring bills that are lower in total dollars leaves you greater financial flexibility in your planning.
Less Money Spent on Interest
The sooner you pay your mortgage off, the more money you save on interest.
For example, let’s say you have a $200,000, 30-year mortgage with a 5 percent interest rate. If you made one extra payment a month for $300, you’d pay your mortgage off 11* years ahead of schedule, which would be a savings of nearly $80,000* in interest!
*Numbers calculated using Dave Ramsey’s Mortgage Payoff Calculator
Saving interest is a good idea in a broad sense, but the best math will go further. What is more relevant is what you expect to be earning in interest or other investment returns on the money that will be used to pay off the mortgage. If your mortgage is at a very low rate and your invested funds are earning more, then you should pause and do further analysis before paying off the mortgage.
Less Emotional Stress
With that said about careful analysis, for a lot of retirees, the emotional benefits of paying off a mortgage are enough motivation to do it – even if the math suggests differently.
Something truly exhilarating can happen when you part ways with a large debt, like a mortgage. You may feel a weight lifted off your shoulders. You may sleep more peacefully at night. With one less bill to stress about, you may experience less anxiety should the market dip or an unexpected expense pop up.
Have questions? Schedule a no-obligation conversation with the team at Linscomb & Williams to see how we can help.
What to Consider if You’re Carrying Your Mortgage into Retirement
According to a recent report, more than 9 million homeowners age 65 and over have mortgage debt. If you’re one of them, there are several things to think about:
You Can Refinance
Interest rates are at a historic low. Depending on your situation, refinancing your mortgage could be a good avenue to explore if you can’t pay your mortgage off before retirement, or you've otherwise decided that keeping a mortgage is wise. Doing so could potentially help lower your monthly payments, save you money on interest and free up enough extra cash to provide the flexibility to pay it off early or explore other opportunities.
However, be careful. Refinancing your home can backfire if not done the right way. Consider meeting with an independent financial advisor first to ensure you’re not hit with any unwanted surprises down the road.
You Can Use Your Home’s Equity in Retirement
If you are like many retirees, your home may be one of your most valuable assets. And in retirement, there are several ways to tap into this asset to boost your security in retirement. These options include:
- A home equity loan or "cash out" mortgage
- Home Equity Line of Credit (HELOC)
- Reverse mortgage
Each one of these options has its risks, and the right one for you will largely depend on your specific situation.
Here's a real-life situation that might illustrate the point:
Several members of our Houston team were working with a couple where the wife had retired a year ago and the husband was now following suit. Approximately 25 percent of their total net worth was in a residence, almost fully paid off. Their long-run cashflow modeling suggested a very solid probability of realizing their lifestyle goals, with a modeling probability of about 94 percent. However, at today's very low fixed mortgage rates, the modeling indicated that using a a cash-out mortgage for a significant portion of the home equity and augmenting their investment portfolio would increase their modeling probabilities to 95 percent, likely increasing the net legacy assets to their children by almost 20 percent at end of life. The math behind that kind of modeling and decision-making is complicated.
That highlights the need to remind yourself: Before making any home equity decisions, discuss your options with your financial advisor.
You Can Take Advantage of the Tax Benefits
There aren’t as many tax breaks for homeowners as there used to be. But one major benefit of having a mortgage is that you can deduct the interest you pay throughout the year from your gross income when you file your taxes, if you itemize your deductions. In return, this can help lower your tax bill.
This tax benefit may provide some help to those who have to carry a mortgage into retirement, but there are two limitations to keep in mind:
- You can only claim the mortgage interest deduction if you itemize.
- The closer you are to paying off your mortgage, the less interest you have on your loan. This means that even if you’re able to claim the mortgage interest tax deduction, it won’t save you as much money because most of your monthly payment will be going to the principal.
Other Ways to ‘Pay Off’ Your Mortgage
Don’t think that just because you have mortgage debt, you have to suck it up and deal with the payments in retirement. There are other ways to “pay off” your mortgage without actually paying it off.
Relocate and Pay with Cash
Relocating to a more affordable area can be an easy way to reduce or eliminate cash-consuming mortgage payments in retirement, especially if you’re able to sell your existing home and use cash to pay for the next one in an area that has a lower cost of living. This way, you get the benefit of reducing your overhead expenses without having to aggressively pay down your mortgage. And you may free up cash that can augment your income-earning assets in retirement!
This doesn’t mean you have to move across the country. For example, Austin is the most expensive place to live in Texas, with a cost of living index of 119.3 percent (19.3 percent higher than the U.S. national average). The median home costs $551,200.
On the other hand, Houston, Texas has a cost of living index of 96.5 percent (22.8 percent lower than Austin). The median home cost is only $220,000. That’s a savings of more than $230,000 just on housing alone!
Said another way, a retiree relocating from the median home in Austin, with a 40 percent outstanding mortgage, might be able to live in a paid-for median home in Houston and augment their portfolio by close to $100,000 in the process.
Downsizing can be an especially good idea if you’re still living in the same big house you bought when you were raising kids.
Trading your current place for a smaller one can be a simple way to keep costs low. But a smaller monthly payment isn’t the only thing you’ll enjoy. You’ll also potentially save money on:
- Utility bills
- Lawn care and maintenance
- Property taxes
- Home insurance
- HOA fees
Need help figuring out if you should pay off your mortgage before you retire? Schedule a complimentary meeting with the independent financial advisors at Linscomb & Williams, and start the conversation!