Minimizing your expenses in retirement seems like a smart choice – especially if you can get rid of a large cost like your mortgage. Repaying your mortgage will not only ease your financial stress but may give you peace of mind knowing that the chances of becoming homeless if you run into financial troubles are less likely. But paying off your mortgage before retirement doesn’t make sense for everyone’s financial situation. So, when deciding if you should pay off your mortgage before you retire, here are some things to consider.
Consider working with a financial advisor as you chart your course to a secure retirement.
Reasons to Pay off Your Mortgage Before You Retire
Repaying your mortgage before retirement can make your monthly bills more manageable and potentially save you thousands of dollars in interest. Therefore, it might make sense to pay off your mortgage early if one or more of the following apply.
Lower Your Monthly Expenses
If you’re going to be on a fixed income in retirement, taking care of your mortgage in advance can help you lower your monthly bills. Since your mortgage likely takes up a substantial amount of money every month, you will be able to live on less once it’s gone. Reducing your bills will give you more financial stability in the future.
Save Money on Interest
Over the course of your loan payments, you will spend a significant amount of your interest. Sometimes interest payments may cost you tens of thousands of dollars. Accelerating your repayment allows you to free up this money towards something else. While you may no longer be able to deduct your mortgage interest from your taxes, the amount you save on interest might bring more advantages. Plus, as your interest payments decrease, the less you can claim on your taxes anyway.
Mortgage Rate Exceeds the Risk-Free Rate of Return
Hypothetically, a risk-free rate of return is an investment’s rate of return that has zero risk involved. For example, a three-month U.S. Treasury bill (T-bill) rate of return is usually considered risk-free. That said, if your interest rate on your mortgage is higher than low risk investments like T-bills, repaying your mortgage is likely the better investment.
Reasons Not to Pay off Your Mortgage Before You Retire
On the other hand, sometimes, you need to tend to other financial priorities instead of putting your sole focus on your mortgage. With that said, it may not make sense to pay off your mortgage early if one or more of the following apply.
Even if you repay your mortgage, you may risk your financial security if you enter into retirement with too much high-interest debt. So, make sure you prioritize your high-interest debt payments, especially non-deductible debt, like credit cards. Try to get in the habit of repaying your credit card balance every month. This way, when you retire, you won’t have to worry about acquiring a large chunk of credit card debt in your later years.
Lack of a Financial Safety Net
You don’t want to pour every dollar you have into your home and then have nothing left over to pay for other expenses that come up. Keeping a cash reserve of about three to six months of your expenses may give you an adequate cushion, so you don’t have to worry when you must shell out funds for an unexpected expense. As the saying goes, “Don’t put all of your eggs in one basket.”
Need to Boost Your Retirement Savings
If you don’t have enough money set aside for retirement, you should probably shift your focus to boosting your nest egg. Retirement savings accounts such as 401(k)s and IRAs let your money grow tax-free until you withdraw funds in retirement. Contributing to these savings vehicles is a great way to boost your retirement reserves. Also, many employers offer 401(k) match programs where they will match your contributions. They may either do this by matching up to a certain percentage of your contributions or matching up to a certain percentage of your salary. If you’re not capitalizing on your employer’s match program, you could be missing out on additional funds you can use in retirement.
Greater Return With Another Investment
Depending on your mortgage interest rate, it’s possible to yield a greater return with another investment. For example, U.S. stocks averaged a 9.2% return over 10 years, whereas the average rate for a 15-year loan is around 3%, according to Business Insider. Therefore, if you decide to invest in the stock market for a decade instead of paying off your mortgage early, you may come out on top.
How to Pay off Your Mortgage Early
If you discover repaying your mortgage early is the right choice, here are some tips for doing it.
- Make extra payments on your mortgage: A straightforward way to pay off your mortgage early is to make an extra payment every year over the length of your loan. Making one extra monthly payment once a year can shorten the length of your mortgage. You can also pay a little more than your monthly payment each month. This can save you thousands of dollars over the length of your loan. Just make sure to speak to your lender and have those extra payments go towards the principal.
- Make biweekly payments: Instead of remembering to make one extra payment each year or paying a little extra each month to pay down faster, you can make your payments biweekly. Typically, you make a mortgage payment monthly. Although, your lender may allow you the option to change your payments to biweekly instead. You would pay your entire monthly payment every other week. Some find paying a full payment every biweekly payday is better for them. Biweekly payments expedite your mortgage repayment, allowing you to pay it off faster.
- Refinance your mortgage to a shorter term: Refinancing your loan is a good way to get a lower interest rate. This will get you on the right road to paying off your mortgage earlier. One thing to remember, if you have a shorter length of time to pay off your loan, even with your interest rate at a lower point, your monthly payments will be more significant.
Repaying your mortgage before you retire requires special consideration, even if you are only repaying it a few years early. For some, paying off their mortgage before retirement is the right financial move to make. For example, if you plan to stay in your home into retire, it may make sense for you. But, ultimately, you should base your decision on your financial situation. Also, ask your lender if there is a prepayment penalty. Usually, lenders only apply a prepayment penalty within the first five years of your mortgage. However, be sure to check ahead of time.
Tips on Mortgages
- A financial advisor can help you develop plans to accomplish all of your financial goals. This includes paying off your home before retirement. Finding a qualified financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three financial advisors who serve your area, and you can interview your advisor matches at no cost to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
- Your mortgage debt can play a significant role in how you plan retirement. That’s why one of your most useful tools is a free mortgage calculator.
- Use SmartAsset’s mortgage comparison tool to compare mortgage rates from top lenders and find the one that best suits your needs.
Photo credit: ©iStock.com/Andrii Yalanskyi, ©iStock.com/VectorInspiration, ©iStock.com/courtneyk