Nobody wants to go into retirement with a lot of monthly bills, yet paying off your mortgage ahead of your retirement date may not make financial sense.
In the current rate environment, many homeowners are sitting on mortgages with record low interest rates, which begs the question do I pay it off or use the money elsewhere?
“There’s a lot of peace of mind with having your mortgage paid off,” says Lisa Hay, founder and president of Ascend Financial. “On the other side it’s foolish to pay down a 3.5% mortgage using money that can earn 10%.”
According to financial experts, before you can decide whether you can afford a mortgage in retirement you have to figure out where you want to be. For instance do you plan to downsize, move somewhere else or hold on to your home once you stop working. These are all things that need to be considered. Equally important is the state of your cash flow in retirement once all the bills are paid.
“I’m in favor (of paying off the mortgage) as long as it doesn’t take away from fully funding your life insurance, IRA and 401 (K),” says Jeff Warnkin, a certified financial planner at The JL Smith Group. “With most things financial it’s not a stand-alone decision.” Warnkin says you have to look at what your sources of income will be in retirement, what your expenses will amount to, the tax rate you will fall into and how much of a return on your investments you are getting.
Another important factor in this decision is the amount of high interest rate credit card debt you are carrying. Christopher Jones, chief investment officer at Financial Engines, says pre-retirees need to tackle that debt first before even thinking about paying off their mortgage. He also says to make sure you are taking advantage of your company’s 401 (k) matching program before throwing money toward the mortgage. After all, you don’t want to pursue so-called peace of mind by leaving free money on the table. Not to mention having a mortgage gives you tax breaks and if you have equity in the home you can borrow against it typically at a lower interest rate than an unsecured loan.
Once you’ve played the numbers game and you still want to pay off your mortgage there are a bunch of ways to do that. For one, if you come into a large sum of money from an inheritance, property sale or any other way, experts say go ahead and pay it off. Make sure you won’t get hit with any charges for prepaying off your mortgage before you make a lump sum payment. Hay says most lenders don’t penalize you any more for paying your loan off early but it’s worth checking ahead of time.
If you are like the majority of home owners and don’t come into a windfall, throwing extra money at your mortgage each month can help reduce it, even as little as $50 or $100. The key is to make it a habit and do it every month. Hay says to be wary of any fliers you receive in the mail from companies claiming to help you pay off your mortgage quicker. She says all these companies are doing is making the extra payment for you which you can easily do on your own.
Really want to get the mortgage paid off quickly, then Warnkin says to pay one half of the mortgage payment every two weeks. “What that does is not only decrease the interest you pay over the life of the loan but over the course of the year you end up making 13 full mortgage payments instead of 12,” says Warnkin. “That will have a dramatic effect on reducing your interest and getting the mortgage paid off.”