Should Retirees Pay off Their Mortgage?

Should retirees pay off their mortgage

There is a certain peace of mind that comes with a debt-free retirement to some people. However, one of the key goals in life is to pay off your mortgage before retiring. Many retirees now not only have mortgages, but they often have highly substantial ones. So, should retirees pay off their mortgage or keep making monthly payments? It’s one of those debates that rarely appears to have a clear winner.

The answer is never simple, and it is always dependent on each person’s unique circumstances, not on the collective wisdom of so-called experts. 

Here’s what you should consider.

Pros

1. Protection in Housing Markets That Are Unstable

Refinancing a mortgage relieves stress, provides peace of mind, enhances cash flow, and creates a substantial equity buffer that they can use in an emergency.

The impact of an uncertain real estate market on homeowners is a big concern for many homeowners, especially those who recall the Great Recession. In addition, many homeowners are concerned about their ability to keep up with their mortgage payments during a large-scale financial catastrophe.

2. Savings on interest

Mortgage interest payments are almost undoubtedly tax-deductible. However, the interest on a home equity loan is only deductible if the loan sum is less than $100,000. In addition, under the Alternative Minimum Tax, mortgage deductions may be disallowed.

That is merely one aspect of the tax problem because invested earnings are almost certainly taxable as well. Whether you receive dividends, long-term capital gains, short-term capital gains, or interest, your tax rate on investment earnings will vary. Also, after-tax returns must be higher than the after-tax mortgage rate.

3. Debt-free retirement

Retirees frequently have to take more money out of their retirement accounts to cover mortgage payments than they would have if the mortgage was paid off. These withdrawals often result in higher taxes and a reduction in money available to retirees.

That’s why many financial advisors advise their customers to pay off their mortgages while they’re still working so they may retire debt-free.

Cons

1. Other financial obligations

When it comes to paying off debt early, there is a rhythm to it. First, you should pay off any debt with a greater interest rate than your mortgage since this will help you save money on interest payments. Second, before paying off the mortgage, consider paying off debt with a short-term teaser rate. Keeping a debt with no interest for six months and then seeing it rise to 16 percent would not save you money in the long run.

2. Opportunity Cost

Even if you consider your home to be an investment, albeit an illiquid one, residential real-estate values have lagged behind other traditional portfolio investments in terms of long-term growth. For example, historically, real estate returns have been lower than stock returns. So investing that money in a brokerage account will more than likely outperform the increase in value of your property over the next ten years.

3. Financial situation

Paying off your mortgage with all of your liquid funds may put you in a vulnerable financial position. You lose a financial safety net when you drain your savings. If you have a financial emergency, you may be compelled to make financial decisions that are even more expensive than preserving your mortgage. Never use your emergency savings account to pay off long-term debt.

Now, you can easily weigh your outcomes for the buzzing question of “should retirees pay off their mortgage early?”.

Endnote

For many homeowners, paying off their mortgage is a dream come true. But, if you and your family can achieve this goal, paying off your mortgage could be a wise decision. That’s the simplest way we can answer, “Should retirees pay off their mortgage?”

It will free up extra money every month and provide greater financial security during a housing crisis. In addition, paying a mortgage early allows you to save more and may even allow you to pursue your aspirations that require further financial support.