Conventional wisdom says to pay off your mortgage by the time you reach financial independence. Why is that not always the best approach?
It seems to make sense – a mortgage paid off before retirement reduces your monthly expenses and reduces the amount of debt you hold. So common is this desire that Wikipedia has an entry on mortgage burning. When then must you carefully evaluate whether this approach works for you?
The decision involves more than math. Possessing a high confidence that you will earn more (after-tax) on your money than you pay in mortgage interest indicates you should keep the mortgage. Yet that ignores the psychological benefit you get from a paid-in-full home. And if you have a high aversion to debt, would you prefer to be mathematically correct or to sleep well?
You should not ignore other financial goals. After paying off the mortgage, can you still deal with unexpected expenses, health care needs, home renovations, or helping out family members? Do you still have high-interest rate credit card debt that should be paid off? Do you feel comfortable with the size of your retirement nest egg or should you direct funds there instead?
Gauge your feelings toward alternative approaches. Some clients view their mortgage as paid off as long as they have the assets available to pay it off at any time. Some would consider the more consumer-friendly reverse mortgage. You may even have the ability to shore up other weaknesses in your financial picture while reducing the debt in the home.
To learn more, check out these recent articles:
- Should you pay off your mortgage when retiring? (CNBC)
- Maybe You Shouldn’t Pay Off Your Mortgage Before Retirement (Fox Business)
- Reverse Mortgages (Federal Trade Commission)
This decision is not easy. Various economic, psychological, and outside factors all play a role in the right decision for you. Consider seeking out guidance from a qualified financial adviser to avoid missing out on creative solutions to this challenge!
Think about your own situation. Is a mortgage in retirement a burden or a liberating opportunity to use those assets elsewhere?
Elliott Weir, MBA, CFP® has been working with families to help them navigate retirement since 2004. He started III Financial in 2012 to focus on helping address the financial realities faced by people over age 50, without the sale of products or the large asset fees of money managers. He is also the editor for the Society of Financial Service Professionals “Retirement Counseling” newsletter.
Elliott earned his MBA in 2002 through the McCombs School of Business (University of Texas at Austin). He enjoys watching the US National soccer team, tinkering with technology alongside his son Travis, keeping up with his son Tyler, and going to see movies with his wife of 17 years, Carrie.
For more, please read his full bio.
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