Should you Pay Off your Mortgage before you Retire
You have a lot of decisions to make before you retire, and one of the most important decisions you make probably revolves around one of your largest single assets: your home.
The question that many retirees ask themselves is “Should I pay off my mortgage when I retire?” or, more appropriately, “Should I use some of my retirement savings to buy my house?”
No one can make this decision for you, but there are lots of different things to consider when you’re closing in on retirement and thinking about what to do with your home loan. You’ve probably already created an Individual Retirement Account, but you may not have thought about the details of your housing situation. Now it’s time to think specifically about your home. Here are some of the things you should think about when you’re weighing the pros and cons of paying off your mortgage in your retirement years:
Living In Your Home During Retirement: Take a good look around your house and think about whether or not you’ll be able to stay in your home for the next 20 years. Is it located where you want to be? Or are you just itching to move somewhere else the moment you retire? It is accessible and easy to move around in, especially for older people? You may be that older person one day! These are things to consider before retirement. Some people purposely buy small retirement homes in different locations so that when they retire they can simply sell their existing home, pocket the profits, and continue to enjoy their retirement with the added income.
Your Savings and Income: The retirement investing plan you build will ultimately determine what kind of money financial resources you have at your disposal. Some people retire with a large amount of money and very little in regular income, while others retire without much savings but a regular source of income. Different retirement investing plans will put you in different financial categories, but you’ll want to weigh your monthly income with your current savings to see if it makes more sense to pay off your mortgage before retiring or not.
How Much You Owe: This is obviously the biggest factor that you need to think about when it comes to paying for your home after you’re retired. If you only have five more payments to go until you own your house free and clear, then it’s obviously worth it to you to finish out the loan. Once you’ve paid the last mortgage payment you’ll have more monthly money available to spend on other things during your retirement. If you still have ten years of payments, then you will need to think about whether or not those payments are significant enough in amount and quantity to lead you to sell and downsize your home now.
Mortgage Rate: Paying off a high-interest mortgage can actually save you a lot of money over the life of the loan, but a home loan that is fixed and relatively low may not be worth paying off, especially near the end of the loan when you’re paying more principal than anything else. From a simple financial standpoint it usually makes sense to pay off loans when you can, but if you need to hang on to some of your reserved savings or don’t have a lot of money that’s liquid, then monthly payments could still be a good option.
So, what should you do?
For most retired people or Baby Boomers nearing retirement age, it actually makes more sense to pay off your mortgage, or at least a large portion of it, before you actually retire. The assumption is that you have a sizeable retirement nest egg already built up and you aren’t starting your savings plan two years before you stop working. There are a few reason why paying off your mortgage before retirement is a good idea:
Live On Less Income: You’re probably going to be living on less income when you retire than you had when you were working full time and by lowering or eliminating one of your largest monthly expenses – your mortgage, you will obviously have more available cash on hand each month.
Avoid Housing Market Shifts: If you’ve paid your mortgage then you don’t have to worry as much about “losing” value in your home because all the value in your home is essentially yours to keep. Nor do you have to worry about the rate flucuations you may get with an adjustable rate mortgage. Yes, equity will go up and equity will go down but chances are you still have a fairly decent amount of financial power stored in your home. If you decide to downsize at a later time you can take some of that built up equity and add it to your nest egg or use it for living expenses.
Increased Freedom: Not carrying a mortgage in retirement allows many people the emotional freedom to explore other living options and to use their savings for more enjoyable pursuits other than paying off the bills that were always there.
Some of the pitfalls of paying off your mortgage are not having enough money to live on, having some of your retirement savings tied up in your home’s value (which could erode or grow erratically) and feeling “trapped” in your own home due to the monthly payments. There are also many tax implications to consider and you’re best off talking to a tax expert about your particular financial situation.
Many people who haven’t had a chance or the foresight to build a long-term retirement investing plan of their own over the years of their career may consider selling their current home when they retire and using that money as a type of retirement income. With proper investing the amount of money you get from a home sale may actually provide enough financial stability to last you well into your retirement years!