Wise or Foolish: Carrying a Mortgage Into Retirement

Ahh…retirement. It’s a time most working people look forward to, especially toward the end of their careers. A comfortable retirement requires you to take care of your finances ahead of time. That may mean paying off your mortgage loan before you go into retirement.

Advantages of Paying Your Mortgage Pre-Retirement

You can never know how much money you need to have in retirement because you don’t know how long you’ll live. If you can manage to pay off your mortgage before you retire, you’ll have one less expense to worry about once you retire. And since a mortgage is a pretty big expense, you’ll have taken a lot off your plate.

You’ll have more freedom in spending your retirement income without a hefty mortgage to pay every month. Retirement income is often less than pre-retirement income. If you’re stuck with a mortgage, you’ll have to reduce other expenses which could sacrifice your quality of life.

You own your home. You can take advantage of the home equity during retirement, if you have to. Reverse mortgages have become more popular in recent years allowing seniors to receive income based on their home equity. You don’t have to make payments on a reverse mortgage as long as you live in the home.

If you own your home before retirement and don’t take out a reverse mortgage, you can feel comfortable leaving your home to a relative. Though they may have to pay taxes on the property, they won’t be faced with a mortgage payment.

Why You Might Keep Your Mortgage Into Retirement

You’ll keep the mortgage interest deduction, which will lower your tax rate. Your tax situation can change significantly when you enter retirement. Keeping some deductions will help keep your taxes low. Keep in mind, though, to take advantage of the mortgage interest deduction, you’ll need to itemize your taxes. You’ll need to enough itemized deductions to outweigh the standard deduction. Right now, it’s $5,700 for single filers and $11,400 for married filing jointly. But that could change by the time you retire.

If you can’t afford to pay off your mortgage before you retire, there’s no sense making your financial life more difficult by trying to pay down your mortgage balance. You could accelerate your mortgage by making extra payments, that’s if you can afford to do that. More often than not, it makes more sense to put that extra money into retirement savings rather than putting it toward your mortgage.

Think twice about refinancing into a shorter-term mortgage just to pay it off early. Once you refinance, you’re locked into the new payments. You don’t have the flexibility to make lower payments during months when money is tight. It’s better to leave your mortgage as is and make larger payments when you can afford to.

To Pay or Not to Pay?

Every financial situation is different. Whether you pay your mortgage before you retire depends largely on whether you can afford to and whether you could get more money by investing the additional mortgage payment. Also consider the amount of time left to pay your mortgage – 5 years is a lot different from 15 years.