Money & Policy

Mortgage or Consumer Debt; Which Is Better in Retirement?

There are some advantages of maintaining a mortgage

For people in or approaching retirement,  there are two main categories of debt: mortgage-related debt and consumer debt.

Mortgage-related debt covers home-related borrowing, while consumer debt includes all other types of debts.

Mortgage-related debt

  •     Primary mortgage: a method of borrowing to purchase a home
  •     Home equity loan: a one-time method of borrowing against the equity in a home
  •     Home equity line of credit: a renewable method of borrowing against the equity in a home
  •     Reverse mortgage: a method of borrowing against the equity in a home, available only to homeowners age 62 and older

Consumer debt

  •     Installment loan: typically a method of borrowing a fixed amount of money for a large purchase, such as a car
  •     Student loan: a method of borrowing to pay for higher education expenses
  •     Credit card loan: a renewable method of borrowing for nearly any type of consumer expense (food, gas, health-care costs, entertainment, etc.)

Is a mortgage in retirement a good idea?

Should your primary mortgage be paid off by the time you start retirement or as soon as possible thereafter? The upside to retiring a mortgage is the elimination of the (typically) largest monthly expense most people have, thereby freeing up cash flow for other needs, such as increasing medical expenses.  There also is the emotional security of knowing you will “always have a roof over your head.” The downside to paying off a mortgage may be the loss of other financial assets, such as savings or withdrawals from retirement accounts. Once the mortgage is paid off, you can no longer access the equity in your home except perhaps through a home equity loan/line of credit, a reverse mortgage, or selling your home.
In any case, access to cash may be limited by paying off the mortgage early, rather than continuing to make payments over the term of the loan. You also may lose a potentially valuable tax deduction (depending on your tax bracket) for interest payments on a mortgage, assuming you can itemize your deductions on your tax return.

This material is provided by MyRetirementPaycheck.org, a site from the National Endowment for Financial Education that helps people explore all of their retirement decisions.

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