Should I Pay Off My Mortgage Before I Retire?

(This article previously appeared on Policygenius.com.)

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The “American Dream” of homeownership is supposed to go something like this: You buy a house in your late 20s or early 30s, diligently make payments on your 30-year mortgage and pay off that loan well before retirement.

That may have been reality for your grandparents or even your parents, but today more people are still making mortgage payments well into retirement. Data from the U.S. Census Bureau shows fewer than 50 percent of retirees ages 65 to 69 own their homes outright. That’s down from nearly 60 percent in 2000.

I’m about to turn 50, and if you’re like me and considering the pros and cons of paying off your mortgage before retirement, it’s important to know mortgage debt isn’t necessarily a bad thing. Unless you owe more on your home than it’s worth, or you’re strapped with expensive, overwhelming financing, you can relax a little knowing on-time mortgage payments are a positive for your credit scores.

That matters because good credit saves money on things like credit card interest rates, insurance premiums and even your mortgage payments themselves. Over time, the savings can be substantial. So, unless you’re at or quickly nearing retirement, don’t fret too much about those monthly payments.

With that said, here are some things to consider when deciding when, and if, you should pay off your mortgage debt.

You have the cash If you have enough, or close to enough, cash sitting in a money market or equally liquid account, it could save significant interest if you go ahead and pay off your mortgage, in part or in full. It'll free up cash you can reinvest in the funds each month.

There’s no tax savings If you’re like a lot of Americans, the new tax law means you’ll be taking the standard deduction in 2018 instead of itemizing. That means your mortgage interest deduction is essentially worthless. In that case, it may be well worth reducing your liquid assets in order to pay off your mortgage.

You want to free up the income If your monthly cash flow needs a boost, paying off your mortgage is a great option. It doesn’t mean you won’t have access to the assets you use to pay off the loan. Instead, those assets will rest in your home. You can access them through a home equity loan or line of credit, or even a reverse mortgage later in retirement.

You’re cash-strapped If paying off your mortgage would leave you without an emergency fund, it may not be wise to do so, even if it would free up your monthly cash flow. Instead, you may want to consider making larger monthly payments toward your mortgage in order to pay it off more quickly rather than doing so all at once.

You’d pay penalties If your mortgage includes a prepayment penalty for paying off the debt early, it may not be a good idea. Check with your bank to see what is possible and just how much an early payoff will cost.

Likewise, if the funds you’d use to pay off your mortgage are tied up in an individual retirement account or 401(k), consider whether you’d pay a penalty for early withdrawal and if it makes sense financially to do so.

You’re not already maxing out your retirement contributions If you’re still working and aren’t contributing the maximum amount possible to your 401(k) and IRAs, it's often better to make those a priority before your mortgage. Talk to your accountant or other financial professional to see what’s best for your situation.

You have other, higher-interest debt If you’re carrying credit card debt or have other loans that cost more in interest than your mortgage, it’s a good idea to pay this debt off first. Remember, mortgage debt can help your credit score. Carrying credit card debt, however, won’t, since it directly affects your credit utilization. The higher your carried balances, the lower your credit score.

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