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Getting rid of what may be your largest monthly expense and unburdening yourself of debt are great benefits of becoming mortgage free at any age. But it may be particularly attractive as you approach retirement.
“Back in the 20th century, people used to burn their mortgage documents once they had paid the loan off,” said David Reiss, a law professor who specializes in real estate and consumer financial services at Brooklyn Law School in New York. “That practice reflected the freedom that many felt from no longer having to borrow to own their family home.”
Indeed, that emotional freedom helped make the idea of paying off your mortgage before retirement conventional wisdom for financial planning.
And there are still good reasons to consider it.
“It’s always helpful to pay attention to rules of thumb like, ‘You should pay off your mortgage before retirement,’” said Reiss. Those rules are often true under typical circumstances. But you want to understand the assumptions behind the rules and see how they compare with your situation.
Traditionally, the main reasons to pay off your mortgage before retirement are to get rid of the monthly payment (perhaps allowing for a better balance of income with expenses) and to gain the emotional benefit of having your home paid off, said Casey Fleming, a California-based mortgage advisor and the author of Buying and Financing Your New Home.
But there can be other considerations as well. These can include:
Each of these areas can provide good reasons to sunset a mortgage, but also good reasons not to. It all depends on personal circumstances, so it’s important to take a closer look.
Balancing income and expenses
For some people, retirement means shifting to a fixed income that may be lower than what they brought in during their working years. Eliminating a significant bill ahead of time — like a mortgage payment — may make living on a fixed income a little more affordable.
But that may not be the case for everyone.
“For instance, most people see a significant drop in income when they retire,” Reiss said. “If that is not the case for you — you have a great pension, your spouse is still working, etc. — then you have more flexibility when it comes to your mortgage.”
When matching income and expenses in retirement, it’s important also to take a long-term view. For example, if your spouse will retire a few years after you do, you may want to increase your mortgage payments to time their retirement with your loan payoff date.
Emotional benefits
When you carry a mortgage, someone else has a powerful legal hold on your home. Forget to pay your homeowner's insurance bill? Your lender can buy coverage — very expensive coverage — on your behalf. Miss too many loan payments? Your lender can foreclose.
As noted earlier, taking back that power made paying off the mortgage a celebratory event. Not only did people burn mortgage documents, but some also hung eagles over their doorways, using the symbol of American freedom to herald their freedom from mortgage debt to visitors.
Yet you’re never truly free of foreclosure risk — you’ll still have to pay your property taxes even after you’ve extinguished your mortgage. And most people should still carry homeowner's insurance, even when a lender doesn’t require it — which means you’ll have to answer to your insurance carrier. If they don’t like the wood-burning stove in your garage, you’ll have to take it out unless you can find another company that approves having it.
Still, many people feel differently about their homes once the mortgage is paid in full.
Liquidity
Paying off your mortgage before you retire — assuming that you’re not already on schedule to do so — means using assets you might otherwise allocate elsewhere.
Generally, if you have enough money in your retirement fund to handle your living expenses comfortably, plus a cushion for extraordinary expenses (like medical bills as you get older), then it’s safe to pay off your mortgage, Fleming said.
But it may be unwise to use liquid assets, such as stocks, bonds, and cash, to pay down your mortgage as you approach retirement because home equity is far less liquid. If, after you retire, you wish you had that money back, you may have to look at options for selling your home, refinancing it, or getting a reverse mortgage, all of which require time and fees.
Return on investment
Paying off any sort of debt gives you a guaranteed return on investment. If you’re carrying a mortgage at 7 percent, paying it off may be attractive because you typically would have difficulty earning a guaranteed 7 percent long term anywhere else.
Of course, with a lower mortgage rate or a higher risk tolerance, early mortgage repayment becomes less attractive from an ROI perspective. So, it becomes a personal choice about risk and lifestyle. (See: How to prevent debt from ruining retirement)
Taxes
Another argument in favor of paying off your mortgage before retirement is if you won’t lose a tax deduction by doing so.
“The standard deduction is pretty high now, and many seniors don’t benefit anymore from the mortgage interest tax deduction,” Fleming said.
If your standard deduction is greater than your itemized deductions — and for the vast majority of Americans, it is — you can’t reduce your tax obligations by deducting your mortgage interest.
However, the standard deduction in effect today could halve in 2026. The doubling of the standard deduction that became effective in 2018 is one of many tax code provisions that’s set to expire at the end of 2025.
And even if your mortgage interest by itself doesn’t get you over the standard deduction threshold — in 2023, that’s $13,850 for single taxpayers, $27,700 for married taxpayers who file jointly, and $20,800 for heads of household — when combined with other itemizable deductions such as charitable donations and state and local income taxes, paying off your mortgage early might increase your tax bill.
“If you pay off a mortgage early, you are saving on mortgage interest, but you may also be giving up the mortgage interest deduction,” Reiss said. “If you do not pay it off early, you can earn interest in a bank account, but you will be paying taxes on that interest. You want to think through the consequences of your choice to see which is the most financially attractive, including the tax consequences.”
Inflation
The higher the inflation rate, the less financial sense it may make to repay your mortgage early.
“A fixed mortgage payment becomes more affordable over time if inflation is high,” Fleming said.
If you’re a borrower with fairly low fixed-interest-rate debt, high inflation usually works in your favor. The dollar loses value, but your mortgage payment stays the same. (Learn more: Is your retirement portfolio inflation ready?)
Leaving an inheritance
Some parents may be emotionally attached to the idea of leaving their home to their children when they die. It’s such a large, tangible asset, and in many cases, years of memories have been built there. Remove emotion from the equation, however, and the calculation changes.
“The best way to think of home equity is as one of possibly several buckets available to leave to your kids,” Fleming said. “Most middle- and upper-middle-class retirees have at least some retirement funds. In retirement, they draw down those funds to live on.”
Conversely, parents might choose to have less home equity but keep more of their retirement principal intact, whether that’s through not paying off an existing mortgage early, refinancing into a longer term, or taking out a reverse mortgage. All of these options cost you interest — and in the latter two cases, fees — but having a larger nest egg can earn you more money than a smaller one.
“When heirs understand that either home equity or the value of the retirement fund is going to be depleted, they are less concerned about which bucket the money has to be drawn from,” Fleming said. (Related: Anticipating an inheritance? What to really expect)
Further, just because your home is paid off doesn’t mean your kids can inherit it free and clear (though setting up a trust could help).
- The home may need to be sold through probate to cover other obligations of the estate.
- Your kids may have to sell it to liquidate and divide their inheritance (an outcome that permanent life insurance can help prevent).
Financial simplification
It’s hard to admit that our skills might slip — that biology may one day rob us, gradually or suddenly, of the knowledge we’ve spent a lifetime building. In that respect, getting rid of the mortgage may help free yourself to focus on your favorite hobbies and relationships. Our most valuable asset is time.
“Simplifying your finances allows you to free up brain space for other things,” Reiss said. “And as we age, our ability to cope with financial complexity often diminishes, so simplifying early may help you plan for that reduction in your financial acumen over the course of retirement.”
But again, that desire needs to be balanced with retirement income needs and demands. Many people consult a financial professional about forming such a strategy and making sure the right documents and safeguards are in place. (Learn more: Planning for your old age … while still of sound mind)
Conclusion
There are many arguments in favor of paying off your mortgage before you retire — but perhaps just as many in favor of taking a different approach as part of a holistic financial plan. In fact, taking a mortgage into retirement can present additional challenges as well. (Related: The pros and cons of paying off a mortgage after retirement)
Need help thinking it through? A financial professional can help you weigh the options and see how different decisions could affect your nest egg, your heirs, and your peace of mind.
Discover more from MassMutual…
Downsizing in retirement: Is it better to rent or to own?
How to grow wealth approaching retirement
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