Should I pay off my mortgage before I retire?

You’ve been working for a long time and can finally see the finish line: Retirement. Endless Saturdays, spur-of-the-moment travel and all the late mornings you could dream of. Your one nagging concern? The remaining balance on your mortgage. It makes you wonder: Should I pay off my mortgage before I retire? That depends. So, let’s dig into the potential benefits, and drawbacks, of paying it off, as well as instances when it may make sense to retire with a mortgage balance.

Potential pros and cons of a mortgage-free retirement

One way to get your brain around any plan is to weigh the pros and cons. The plan for a mortgage-free retirement is no different.

Pros

• Keep saving: It’s typically better to make mortgage payments using money from an active income, rather than pulling from your retirement savings. Paying your mortgage during retirement may deplete your savings too soon, which could become an issue when you're unable to earn an income.
• More equity: You’ll have full ownership of your home, and its equity, which may give you more financial flexibility during retirement. You also won’t have any of the worries that may come with a mortgage, such as an increase in cost due to fluctuating rates (if you have an adjustable-rate mortgage) or the potential risk of foreclosure if you fall behind on payments.
• Fewer expenses: Your overall monthly expenses will be lower if you don’t have a mortgage payment. This can give you a little extra room in your budget, whether you want to put it into savings or go on a trip. Don’t forget that you'll likely still have to pay things like homeowners insurance and property taxes, even if you’re enjoying a mortgage-free retirement.

Cons

• Could prevent savings: Prioritizing saving for retirement may be harder if you’re focused on paying off your mortgage. Instead of diverting any extra money toward your mortgage, it may make more sense to focus on continuing to build your retirement savings. You may want to max out your 401(k) and individual retirement account (IRA) before concentrating on your mortgage.
• Makes it harder to invest: If you aren’t sure you can plan for retirement purely through savings, you could also potentially focus on investing instead of paying off your mortgage early. You may want to put your extra funds toward investment opportunities like stocks or real estate, which have the potential to make you more money to use to support your retirement. Note that these types of investments also carry potentially more risk, so you may wish to consult with a qualified investment advisor to learn more.
• May distract from other debts: Instead of putting your energy into paying off your mortgage early, if you have other debts on your plate you may want to focus on the ones with the highest interest rates first. If you have credit card or personal loan debt, those likely have a higher interest rate than your mortgage. If you can pay them off while you still have an income, you can put more money toward your retirement savings. Contact an expert or financial planner for questions or for more clarification.

Common tips for paying off your mortgage

If retiring with a mortgage doesn’t appeal to you, there may be some steps you can take to pay it off a bit faster.

• Use the 1/12 rule: One way to pay off your mortgage quicker without breaking the bank is the 1/12 rule. Divide your monthly principal payment by 12, and then add that amount to your payment each month. Doing that means you’ll pay off 13 months of your mortgage every year.
  
• Try biweekly payments: If your mortgage lender allows it, you could consider making half a mortgage payment every two weeks. After a year, you will have made an extra month’s payment.
• Consider refinancingec-refinance-hl000061: This won’t always be a good option, but if you’re able to refinance for lower interest, a shorter term or possibly both, you’ll pay significantly less interest over the life of the loan. However, be aware that your monthly payment may be higher as a result.
• Throw extra money at it: If you get a bonus, an inheritance, a tax return or any other unexpected amount of money, put it straight toward your mortgage.

In summary

So, should I pay off my mortgage before I retire? As you’ve seen there is a lot to consider. Although the answer ultimately boils down to your personal situation, using the pros and cons above can help think through your decision. Use that information and apply it to your financial circumstances to help make the best choice for you and consider speaking with a financial planning professional if in doubt.

FAQs

How important is it to pay your mortgage off before retirement?

How important it is depends on you and your priorities. Paying it off before retirement certainly has benefits, such as eliminating a recurring expense before losing your employment income. However, it’s not a requirement for retirement.

Can I retire and still have a mortgage?

Yes, just make sure you’re able to continue making your monthly payments. Researching your social security benefits and any retirement income beforehand can be helpful so that you know what to expect each month.

Is it better to pay off mortgage before retirement?

"Better" is a subjective term. There are benefits to paying off your mortgage before retirement, such as eliminating an expense and having more home equity. However, depending on your financial situation, it’s possible that rushing to pay it off before retirement isn’t the best choice for you. Consult with a home lending advisor or financial planner to learn more.