Our specialty is helping those over 50 years old, retirees, or those looking for an active adult community find a home they need, help with refinancing, and help set a mortgage that works with their lifestyle and their current budget. With that in mind, Should You Pay Off Your Mortgage Before You Retire and what happens if you can’t?
Most of us feel that when we retire we shouldn’t have a mortgage. We’ve been paying mortgages for decades and now that we’re entering our retirement years, not having to worry about a mortgage and just paying the taxes and homeowners insurance is a huge load off the budget. But is a mortgage-free retirement the best option?
Mortgage interest is technically tax-deductible but with a lot of the new changes with the Trump administration, the standard deductible may cover any and all itemized deductibles making the tax-deductible benefit to a mortgage nonexistent. Only about 14 million households will benefit from the mortgage interest deduction compared to over 30 million just a few years ago. That’s not necessarily a bad thing since Congress has doubled the standard deduction in the last few years. But even before this tax reform, those approaching retirement age got fewer benefits from their mortgages over time because they’ve been paying for so long. Most of these borrowers have switched from paying mostly interest to now paying mostly principal.
In order to cover any mortgage payments, retirees may have to withdraw more from the retirement fund than they would have if the mortgage was paid off. But are there any benefits to keeping a mortgage?
You may be able to earn a better rate on investments instead of paying your mortgage. It also depends on how much you have saved for retirement, cash flow, and how investment accounts are doing. When does it make sense to continue making mortgage payments during retirement years?
You certainly don’t want to use your savings to pay off your mortgage and then be unable to cope with any other expenses in the future. If you pay off your mortgage but don’t have any money set aside for emergencies, you may have to get another loan or home equity line of credit for major items such as a new car or a roof. Using your retirement savings to make your mortgage payment could also trigger taxes. If you withdraw more from your Ira to pay your mortgage you may end up with less after taxes. This is a question for your financial advisor and whether it makes sense to continue on paying your mortgage with savings or so security benefits.
Are you making an emotional decision rather than a financial one? The whole idea of paying off a mortgage gives you peace of mind in retirement but some people may want to pay down their mortgage even if the rates are low and their portfolio is earning more. Understand the difference between emotional components and mathematical components. There’s no right or wrong answer as this benefits each individual person differently. It’s important to have an action plan that fits your unique circumstances.
It really comes down to how much money you have on a monthly basis, your interest rates, and whether paying off your mortgage makes sense before retirement.
For more information on finding a home that fits within your mortgage payment or to buy a home with cash contact our office today.