When you retire, should you pay off your mortgage?

Thirty years ago, it was a rite of passage for many people to pay off their mortgage and then retire. This is no longer the norm. According to research done by Fannie Mae’s Economic and Strategic Research Group, Baby Boomers, born between 1946 and 1965, have more debt than earlier generations did at the same age and are less likely to own their own homes by the time they are ready to retire.

For retirees or people close to retirement, the benefits of paying off a mortgage depend on income, the size of the mortgage, savings, and whether or not the mortgage interest can be deducted from income taxes.

Think about these things:

• Americans born between 1946 and 1965 have more mortgage debt than before.

• People who are retired or about to retire and have a high-interest mortgage but can’t deduct the interest may want to pay off their mortgage.

• You should never use money from your retirement account to pay off your mortgage.

Keeping mortgage payments on schedule

If retirees can afford monthly mortgage payments, it might make sense if the payments do not cut into their standard of living. It’s a good choice for high-income retirees, mortgages usually have a low-interest rate (less than 5%), and the interest is tax-deductible.

But if paying off your mortgage means you won’t have enough money saved for unexpected expenses or emergencies, like medical bills, it’s better to keep making payments.

This is a good option for retirees who can afford to keep paying their mortgage and get a tax break. You might want to if you plan to retire soon and have the money to pay off your mortgage. It is especially true if the money is in a low-interest savings account. This is best if you have a big emergency fund and a well-funded retirement account.

When a fixed income makes it hard to make mortgage payments, it makes sense to pay off the mortgage before retirement. If you don’t have to pay your mortgage monthly, you won’t have to take money out of your retirement account to cover it.

Retirees shouldn’t take money out of their retirement accounts.

Money shouldn’t be withdrawn from a retirement account like an IRA or 401(k) to pay off a mortgage. If you take out a lot of money from your retirement plan before you’re 59.5, you’ll have to pay taxes, and the early-payment penalty can put you in a higher tax bracket. It is possible that even if you wait, you would be placed in a higher tax bracket if you took a large distribution.

Also, it’s not a good idea to pay off a mortgage while putting money into a retirement account. Those getting close to retirement must put as much money as possible into their retirement plans.

Recent research shows that most people are not saving enough money for retirement. In September 2018, the National Institute on Retirement Security said that 57% of people who are working age do not have a retirement account. Even if workers have saved money, the report says the average amount in their retirement accounts is $40,000.

How to pay off your mortgage or pay less of it

There are a few ways to pay off your mortgage early or lower your payments before you retire. If you pay every two weeks instead of every month, there will be 13 payments yearly instead of 12.

Additionally, you can refinance your mortgage if it will result in a lower interest rate and a shorter term. Refinancing may help you in the long run, but it could hurt your net worth in the short term. No matter how old or new a mortgage is, it is a liability that takes away from a household’s assets.

Another choice is to sell your bigger home and buy a smaller one. With the money you make from the sale, you might be able to buy a smaller home outright, and this would leave you without a mortgage. Some mistakes to avoid are underestimating the cost of a new house, overestimating the value of your current home, not taking taxes into account, and forgetting about closing costs. While paying off your mortgage and owning your home free and clear before you retire can give you peace of mind, it’s not for everyone. If you are retired or will be in a few years, you should talk to a financial advisor to help you make the right choice.