In an ideal world, you would enter your golden years debt-free. By erasing what is usually among the biggest debts anyone has, your mortgage, you would undoubtedly make the math on your monthly retirement budget much easier. But whether or not paying down that debt is feasible to do — let alone the most financially responsible move to make — is a whole other question.
The answer will depend on the specifics of your financial situation and mortgage loan. After all, the “right answer for a homeowner carrying a 2.875% mortgage, a solid brokerage account and a reliable pension looks very different from the one facing someone with a 6.5% loan heading into heavy IRA withdrawals,” said Kiplinger.
Why prioritize paying off your mortgage before retirement?
The most obvious benefit of paying off your mortgage before retirement is that you will cut a major expenditure from your budget. “Without the monthly mortgage payment, your Social Security, retirement funds, or pension will go much further, providing more funds for living expenses, hobbies, and travel,” said Investopedia.
You also stand to save a significant amount on interest, particularly if your mortgage has a high interest rate. “Depending on a home loan’s size, interest rate and term, the interest can cost hundreds of thousands of dollars over the long haul,” said Charles Schwab. You can then put those funds towards other uses or invest them.
When does it not make sense to pay off your mortgage before retiring?
Even if the peace of mind a paid-off mortgage offers sounds appealing, it is not necessarily the right move financially. “Tying up too much of your savings or net worth in your home can create challenges,” if down the road you lack the liquidity to cover an emergency expense or a significant healthcare bill, said Investopedia.
It is also important to weigh the costs—both literal and opportunistic—to an early mortgage paydown. Depending on your lender, you could end up owing prepayment penalties for paying off your mortgage ahead of schedule. Or, if you have higher-interest debt, such as credit card debt, but focus on your mortgage instead, that could end up costing you more overall due to the accrual of interest.
Shifting your focus to your mortgage could also result in you putting “retirement savings on the back burner, which could come back to bite you when you stop working,” said Northwestern Mutual. And, depending on your mortgage rate and how it compares to potential investment returns, you might actually be better off investing those funds instead of putting them toward an early mortgage payoff.
What should you consider when deciding whether to pay off your mortgage?
A lot of the decision comes down to the numbers. You will want to consider, “Does your mortgage rate cost you more than what you can likely earn elsewhere? If it does, then paying it off might be better,” said Investopedia.
Additionally, you will want to determine how paying down your mortgage would affect your cash reserves. If you need to drain your savings to do so, then it might not make sense for your overall financial health.