Should you pay off your mortgage for retirement?

By ANTHONY SAFFER

Evaluate these 5 factors to consider if you should pay off your mortgage for retirement.

Most homeowners have utilized a mortgage loan at one point to help purchase a home. The straightforward purpose of using the mortgage to gradually acquire full ownership of your house is sometimes disrupted by refinances and tax incentives. Because mortgage interest is generally tax-deductible and interest rates are currently low, some believe that a homeowner should extend a mortgage as long as possible. So, should you pay off your mortgage for retirement? Here’s what you should consider:

Stability of Income:

To start, I’m generally in favor of homeowners pursuing the goal of paying off their mortgage for the simple reason that it creates an element of financial safety. A home is not to be categorized as just another investment (even though a paid-off home certainly carries financial benefit). Reckless lending and borrowing tactics caused one of the worst economic declines in American history culminating in 2008 with failing banks, high unemployment and tumbling investment values (including stocks and real estate). During this tumultuous time, retirees who had their house paid off seemed to have a peace that others with a daunting mortgage payment did not. Paying off a mortgage eliminates an expense, but it really represents an element of income stability much like having a monthly retirement pension to supplant a paycheck.

Interest Paid vs. Earned:

This factor is simply a matter of opportunity cost: As an example, if I pay 3% to 4% interest on this money but earn 6% interest on other money, I’m ahead. For many years now, interest rates have been historically low making borrowing more advantageous. This tilts the dial toward keeping a mortgage at a low fixed rate and investing at higher rates. While the math can work, it becomes a comparison of risk. In our previous example, the 3% is a guaranteed savings if I eliminate it. To earn a higher rate, what type of risk must you take on and is it worth it?

Taxes:

As mentioned above, home mortgage interest is generally tax-deductible allowing for an added bonus. The significance of that bonus depends on your personal tax situation. Following the 2018 Tax Cuts and Jobs Act tax reform, which raised the standard deduction, far fewer taxpayers itemize their deductions. You may not be receiving any benefit from your mortgage interest. Additionally, consider your personal tax rates. Making a decision based on saving taxes when you are already paying very little in taxes, doesn’t make sense. If you are in higher tax brackets, you must look at how deductions are limited for you. In either case, remember that tax deductions are helpful but simply trading a dollar paid for 30 cents in return is not a good deal. Consult a quality tax professional when evaluating taxes to decide if you should pay off your mortgage for retirement.

Flexibility:

Eliminating your mortgage payment is a good thing as is having an available lump sum of money which can help create flexibility and security. So, which do you choose? It’s a balance that must be weighed with all the other factors. For instance, it may not be a good idea to sacrifice a large amount of your available money to pay off the mortgage. Alternatively, if you can afford to pay off the mortgage and still maintain financial flexibility, the payoff can aid in creating that stability of income.

Unity with Your Spouse:

It’s not uncommon with a decision to pay off your mortgage for retirement to see it differently than your spouse. Paying off the mortgage can be an emotional decision. Many naturally appreciate the added-security of a debt-free home, while others would prefer to invest (or spend) more. If you are in control of the finances, be sure to value your spouse’s opinion. Most often agreement comes after working through a series of steps that would include identifying goals, problems, and priorities. Communicate why you each believe a certain course of action makes sense and how strongly you feel about it. Also, commit to prayer and seeking wise counsel. If the objective on both sides is truly to make the best decision for your family, unity is usually reached.

Granted, each situation is unique when it comes to decisions surrounding a mortgage. Don’t let one specific factor drive your decision but consider the context of your personal situation. Consult a trusted advisor to help coordinate the aspects of your plan.

Seek financial independence through wise mortgage planning decisions.

And that is just one more Principle of Prosperity!

Anthony Saffer, CFP of One Degree Advisors, Inc. coordinates principled financial solutions for families. Learn more at: onedegreeadvisors.com

Investment advisor representatives offer advisory services through One Degree Advisors, Inc.