Two of the most common financial goals are paying off a home loan and retiring. While both of these may be achievable, it can be challenging to figure out which one to prioritize.
The idea of owning your home outright can be very appealing, especially for people who dislike carrying high amounts of debt. However, others find more security in knowing that they’ve saved enough to cover the cost of their desired retirement lifestyle.
So, which is better? Should you pay off your mortgage before retirement? Let’s look at the pros and cons of paying off your home loan so you can decide whether it’s something you want to prioritize before retirement.
Disclaimer: As CERTIFIED FINANCIAL PLANNER® professionals, we always want to take your individual situation and needs into account.
Mortgage Payments vs. Retirement Retirement Savings
Deciding whether to put more funds toward your retirement vs. your mortgage can be a challenging decision. Let’s look at some of the unique factors to consider.
If you’re in your 40s
At this point in your life, your mortgage is likely one of your largest debts, and retirement may still be a couple of decades away.
Paying off your mortgage early could eliminate one of your biggest monthly expenses, allowing you to put more toward retirement after you own your home outright. However, paying more toward your mortgage now may mean saving less for retirement for a while.
Consider your potential income growth, retirement savings goals, and investment strategy. Then, run the numbers to see whether it makes sense to pay off your mortgage early.
If you’re 5-7 years from retirement
If retirement is only a few years away, paying off your mortgage now could reduce your fixed expenses in retirement. That may give you a little more leeway when it comes to income distribution once you retire.
However, putting more money toward your mortgage now could reduce your immediate access to liquid cash. You might not be able to maximize your emergency savings or take advantage of investment opportunities right away.
Also don’t forget that paying off a mortgage doesn’t eliminate costs entirely. You’ll still need to pay for property taxes, insurance, repairs, etc.
The key question
No matter how old you are, this choice will probably require some tradeoffs. To make the right decision, you need to understand what’s more important to you: freedom from debt or financial flexibility. A CFP® professional can walk you through this decision process with objectivity and your best interests at heart!
Pros of Paying Off Your Mortgage Before Retirement
There can be some big advantages to paying off your home loan before you retire.
Peace of mind
Entering retirement knowing that your largest debt is paid off can help you feel financially secure. This can be especially important during economic uncertainty and market volatility.
Reduced monthly expenses.
Once you own your home outright, you don’t have to worry about putting any of your retirement money toward your mortgage. Having fewer fixed expenses when you retire gives you more budget flexibility for non-essentials like travel or hobbies.
Clear financial return
If your mortgage has a fixed interest rate, it’s easy to calculate the value of paying it off early. For example, if you have a fixed 5% interest rate, you can determine exactly what that 5% interest works out to and how much it would save based on a $0 mortgage balance.
Simpler financial management
Paying off your mortgage means one less bill during retirement, which makes budgeting simpler. It may be easier for you to allocate your money each month without having to factor your mortgage into the equation.
Cons of Paying Off Your Mortgage Before Retirement
Like any major decision, there can also be disadvantages to paying off your mortgage early.
Reduced liquidity
Paying more toward your mortgage increases the equity in your home. However, equity isn’t as accessible as liquid cash.
If you have a financial emergency before retirement, it might be harder to respond to it without taking on additional debt. Likewise, you might not have the funds to put toward an unexpected investment opportunity.
Opportunity cost
Paying off your mortgage early might not be as lucrative as other financial decisions. For example, you may get a better return by investing those extra mortgage payments in the market or putting them toward other assets. (Only a dedicated financial advisor could help you determine opportunities and which ones to take!)
This consideration is especially important if you’re still a decade or two away from retirement. Compound interest can offer significant returns over long periods of time — investing could yield higher returns than the amount you save by reducing the amount of time paying your mortgage interest.
Tax consequences
In most cases, the interest you pay on your mortgage reduces your taxable income. Eliminating your mortgage early can significantly increase your tax liability, which can be especially impactful for high earners in their 30s or 40s.
Inflation
Over the course of your mortgage, your fixed payments typically become “cheaper” due to inflation. Paying off your home early reduces the years you can benefit from this effect.
Maintaining a low–interest mortgage may make it easier to access high-return investments and keep up with inflation.
4 Factors to Help You Decide to Pay Off Your Mortgage or Not
As you’re comparing the pros and cons of paying off your mortgage before retirement, keep your personal financial priorities in mind. Then, run the numbers to see which strategy makes the most sense for you.
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- Interest rate: Compare your interest rate to current mortgage rates. If your rate is significantly lower, it might make more sense to keep it than to refinance into a shorter loan with a much higher interest rate.
- Retirement savings: Are you on track to reach your retirement savings goal? If not, it may be better to focus on increasing your contributions instead of putting more money toward your mortgage.
- Comfort level: When you consider your finances from an emotional perspective, which option offers more peace of mind? If the idea of taking your mortgage debt into retirement is stressful, it might be worth it to pay your loan off early.
- Overall financial picture: Look at the full scope of your income, expenses, goals, and priorities. Is it possible to maintain other goals — like keeping an emergency fund or supporting your children’s higher education — if you pay your mortgage early?
If you want to make faster progress on your mortgage without compromising your retirement goals, consider a balanced approach.
For example, maybe you just put a little extra money toward your principal balance each month and use the rest of your discretionary income for retirement savings. Another possible option is to refinance your mortgage to a lower interest rate. If you can lower your mortgage payments, you can put the money you save toward your retirement.
Balance Both Goals With Help From a Financial Planner
Making a big change in your financial plan can feel stressful. Even after you evaluate your priorities and run the numbers, it might not be clear whether you should pay off your mortgage before retirement.
That’s where a financial planner can help! An expert can help you see the big picture and understand how your age, income, and debt impact your retirement goals and overall financial situation.
Here at Guiding Wealth, we provide customized financial guidance for clients of all ages. Whether you’re just starting out or are ready to retire, we can help you find the best way to reach the financial goals that matter most to you. To get started, schedule a consultation.