May 24, 2020

Financial Uncertainty and Paying Off a Mortgage

An earlier post, A Recession is Very Likely: How Will It Affect Us?  took a predictive look at what may lie ahead of us. The economic recovery from the world's shutdown will be no little thing. White House spokespeople who say the economy will be rocking in July are simply not seeing the facts the rest of us are. The CEO of Southwest Airlines says he would be surprised if airplane travel was back to pre-virus conditions in less than five years. That sober view is probably mirrored by many people in many industries. 

The focus of this post is on retirement and a mortgage. Whether to pay yours off before leaving the workforce is a major decision as you plan your retirement finances and one without a clear cut answer. Add in the turmoil ahead with a serious recession virtually assured, and how you approach this decision is even more important. 

If you have already paid off your mortgage, please keep reading. Your comments and thoughts will be very helpful to others who are not mortgage-free.

Is it best to pay off the mortgage before retirement, or is that extra money better off being invested? With changes in the tax law, the mortgage interest deduction is no longer as important since the standard deduction has been dramatically increased. What if I have a major health expense and can't pay the mortgage..could I end up retired and homeless? 

Good questions with no obvious answers. But, they are worth asking and taking a look at some of the ramifications. As an disclaimer, I am not a tax expert or a financial guru, so what I offer is opinion and some basic thoughts from my own research. Please think through your own situation carefully, consult a trusted adviser, and proceed with caution. 

If you do a Google search about retirement and mortgages the majority of the sites and articles that rise to the top suggest paying off your home loan before retirement. They do admit that many people can't do that, but it should be a goal.

 The reasons most often cited to pay off your mortgage:


1. Peace of mind. Even without a monthly payment you still have real estate taxes, HOA fees, maintenance, repairs and upgrades. But, if you delay fixing a leaking toilet for two months you won't risk losing your home. That big monthly Must Pay bill is gone.

2. Home equity is available. I strongly suggest this source of cash be used only for major repairs and upgrades to your property or something like a large medical expense. Home equity is not a piggy bank so you can take (someday!) a 12 day trip to Hawaii or buy a new truck. Too many people get stuck when they spend their home equity only to find the worth of the house has dropped below the size of the loan. With home equity lines of credit at low interest rates at the moment,  smart use may be able to save you interest over more conventional loans.

3. You have more freedom to relocate or resize. Get in trouble with your mortgage and someone else might tell you when to move. Have no mortgage and you can decide when to downsize or move closer to the kids....or stay put.

4. You have a large source of retirement money available. If you move to a smaller home or condo, or even rent an apartment, any profits after the house sale and purchase are yours. Though expensive and sometimes risky, reverse mortgages can provide a steady income from the equity you have in your residence too.


On the other side of the argument, these points are made:


1. Don't pull  money from other investments to pay off a cheap mortgage. Even losing the tax deduction of a mortgage may not be enough to make up for better performing investments. If you take a chunk of your retirement funds to pay off a mortgage the money left may not produce as much income or growth.


2. Tying up too much of your net worth in an illiquid asset. You own a $300,000 home free and clear. But, depending on the market conditions it might take you six months or more to be able to sell the house and see any net profits. If you need quick cash a house is not the place to find it (except through a home equity loan which comes with its own risks).


3. If you plan on selling soon, or offering your home for rent, there is no real reason to pay it off right away. The cash flow from the rental might cover all or most of your payment, meaning your renter is paying the mortgage. If you think you will be selling soon, there is no major advantage in paying off the rest of your mortgage.

Betty and I plan on moving from our current home in the next eight years or so. We know that at some point we want to move into a continuing care community (CCC). The "buy-in" will be somewhere around $300,000. If we own a home or condo and need to move rather quickly into the CCC because of health issues, our buy-in money will be unavailable until we sell. That maybe too late.

So, if we sense another major drop in housing prices is coming, we will give serious thought to selling our home and renting an apartment/town home. The bulk of our profits from our current home will be invested for safe growth. While the yearly rent is lost in terms of equity, we will have liquidity when we are ready to move to the continuing care community. 


Again, I will remind you I am not a financial planner or expert. I have bumbled along pretty well for the past several decades, but there is always more to learn and consider. If you are a financial planner, investment guide, or CPA, I welcome your input (as long as you aren't trying to sell something!). 

All that said, you have thoughts, concerns, questions, and insight that will help of of us, expert or not. Please add your comments to this important subject. Since a home is generally the biggest expense for most of us in our lifetime, knowing what to do with that resource is vital.

Pay off the mortgage or not...that is the question.

39 comments:

  1. Paying off my mortgage was the most important thing I did for my peace of mind during the banking crisis we had just before Obama took office. I don't regret it one bit. Took me two years of selling off high ticket collectables to do, but it was worth my being obsessed about it.

    My husband and I had rental property for years---an small apartment building and a free standing house and in my opinion, that's the last thing retired people ought to consider doing with their houses even if money-wise it looks good on paper.

    You mentioned not being able to get your cash out of a house quick enough if you want to buy into a continuing care community which I am actively in the process of doing. There are bridge loans you can get to make it possible to do the buy-in while your house is up for sale. My realtor says this is common as a lot of people who go to ccc have paid up mortgages. My realtor specialties in helping elderly people sale their homes and works hand-in-hand with the ccc. Hopefully, it will work as seamlessly as they make it sound. My suggestion for anyone who is thinking that a ccc might be in their future is to tour them long before you hope to move into one. I toured 5-6 of them over two years and they all had different vibes, I even followed their newsletters online. If I hadn't done that I wouldn't have recognized what a good deal I got when a brand new one came long that is being built by a non-profit.

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    1. Some excellent thoughts. The bridge loan is something I have used before but didn't think of it in this context. They do tend to work well, as long as you have enough time to sell your property without having to drop the price dramatically to get it done.

      Betty and I owned four rental homes after we retired. I agree with you: don't do it unless you are very handy, can cover months of unrented property, and you are not depending on the cash flow for living.

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  2. The best response I've yet heard to the issue of whether or not to use excess money to pay off your mortgage early vs. using it to invest in the stock market was this from Dave Ramsey:

    'Would you take out a mortgage on your house in order to use the money to invest in the stock market?'

    Most of us would likely respond 'No,' deeming that action as far to risky. However, in essence that is precisely what we are doing when we delay paying it off in order to invest more in the market. Something to ponder I think.

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    1. I totally agree. Using money you could use to pay of a mortgage and putting into the market instead, strikes me as gambling with your future. Unless you are the type of person who goes to Vegas and bets everything on red, don't do it.

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  3. In retirement, I maintain a mortgage simply because I can earn considerably more in other investments than the 4.5% interest I'm paying. I do admit to taking more risk that most others my age, but that suits my temperament and my ability to outperform the indexes. Even in these turbulent times, I'm up about 10% year-to-date. Yes, I agree that we're already in a recession, but I have an assortment of holdings that should do well in that environment. And houses don't always hold their value: If we have a deflationary depression, your net worth will decline if most of it's tied up in your home.

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    1. Thanks for showing us the other side of the argument. It really is a personal decision, based on your tolerance for risk and the return you can get on the spread.

      Just by their nature, housing prices are unpredictable. If we do having a housing price softening (that has already begun in some markets), you've got to have enough years ahead of you for a rebound to not get stuck.

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  4. We have always been very conservative investors. We also took a series of financial planning seminars back in the 80’s and followed the advice.We paid off our mortgage years ago and the peace of mind is immeasurable! I do expect that we are going to see house values go down in the next couple of years due to the pandemic.but our home is still somewhere we want to live for along time, so I am not worrying about the ups and downs of the housing market. We have never taken equity out of the house. We’re kind of old fashioned.. our parents also paid off a home and aged in place. For folks wanting to downsize,I think the highest you will get for your home is RIGHT NOW (in Arizona prices are still high and homes are IN DEMAND,selling overnight!!) and then if it’s possible to wait a year, buying will be considerably cheaper. I feel we are going to see foreclosures again .Just my thoughts, I have no qualifications,just friends in the industry and my own observations..I love that my home has gone UP so much in value in the past few years, but I STILL want to live here,so we will weather the ups and downs in value. Buying and selling houses and moving are not in our retirement plan for the near future.A paid up house truly helps us sleep better at night.

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    1. I agree. If you live in a big city state, you are probably in for a property recession. The other side? I know that a number of the "working at home" professionals in my daughter's DC metro area who are planning on moving as soon as they can figure out where their kids can attend school. They will just work from home from now on. If they can afford it (which many can)they are willing to let their metro house just sit unsold. There is a major move for a tax revolt because of schools. A very interesting twist to this.

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    2. Working at home is going to change the real estate market quite a bit, not only for homes, but also office space. Moving out of a big city is a trend that the pandemic has exposed. Living in a crowded urban setting does increase the exposure to something like Covid-19. For proof, look at the total number of cases in states like Wyoming or Montana, where there are more space and more cattle than people!

      Madeline - yes, the Phoenix market is hot at the moment. We have had five houses on our street turn over in the past 12 months. Like you, we like our home and how close we are to our family. Moving is expensive and a hassle. If we did so now, we likely would lose money overall if we sold again in 8 years to move to a CCC.

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  5. We have paid off our last (4) houses. It was a security that we lived in. Never worried that we could not make a payment or could not figure out the taxes. Now we even have the standard deduction so we are no longer penalized for not borrowing money. My bag lady nightmares have abated.
    I finally found a reason not to pay it off. We are planning to build our next house. If we had a tiny mortgage on our current house we could easily refinance and take most of the equity out to build the next house. The interest rates are far lower (2.9%) then a bridge (8%) or home equity loan (5.6%). The "opening" charges are about the same. If we were simply purchasing the next house already built, it would not be an issue.
    We will get a small mortgage on our next house. The access to the equity is important as we get to our older stage.
    BTW- I did the math a number of times.We rented for the first 16 years of our 39 year marriage. We now tend to be in a place for 5-10 years. We have come out ahead every house. Once we made money, the other three we broke even within a few thousand $$-including the move. We never lost money. We are not heavily in the market, so it has worked for us.

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    1. By living below our means and timing the moves well, we were able to buy our last two homes for cash...no mortgage at all. In both cases, the sale of the previous house covered the new home's price and left enough money for remodeling and fixups. This is not something many folks can do, but we have lived mortgage-worry free for 16 years, and counting. It feels tremendous.

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  6. For us? YES! One of our life goals was to be debt free before we turned 50. And we did it. Our primary home purchased when we were 30 as well as a small mountain cabin that had good bones and needed a ton of work to make it livable-we've done that work cash-only, over 16 years and just finished last month.

    Doing this enabled us to put a majority of our income into our retirement investments, as our living expenses needed just 30% of our total income.

    Do or don't? It depends on your goals and your income. We consider our 2nd home our LTC plan. We can sell it if our retirement assets dwindle down and cash is needed.

    I do think reaching this decision requires a great deal of work, analysis, goal setting, visioning retirement and then finally, decision making. It should not be taken lightly.

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    1. To pay or pay off the mortgage is an important, complicated decision. This post, or any financial stuff you have read on the Internet should only be used to start your own thinking and planning.

      If our last two homes had been purchased at some other time of our life, we would have had a mortgage. But, being retired, and at a time when returns on money were (and still are) poor, to grab for the security of full ownership fit our needs and personality.

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  7. A bit of a side note for those expressing concern about home prices possibly dropping in the coming months/years - it is definitely not the ideal time to sell if you are looking to buy down, but there is no better time to buy UP than when prices are dropping. Exponentially, a drop in selling prices has a much more dramatic effect in real dollars the higher up you go. We would seriously consider this if that occurs, with another silver lining being that our property taxes would be locked in at the lower purchasing point as well.

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    1. Good points. Too bad the housing market never makes its intentions clear until after they have happened.

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  8. My husband and I are in the camp where we believe having a free and clear home is the best way to approach retirement and/or getting older. Of course we first “rightsized” to a home suitable to our lifestyle (just my husband and I) and made sure it was a home where we could successfully age in place for as long as we wanted. We also added solar and other features making it extremely energy efficient so utilities are low. And because our house is relatively modest our taxes and insurance are also in alignment.

    We literally could not live ANYWHERE in the world for less than where we live now (less than $500 a month including utilities, taxes, and insurance) Sometimes I dream of moving just because…but the advantages of where we live keep that in perspective. Yes we had to make some choices and decisions to rightsize like we did but I wouldn’t change it at all.


    As for where home prices are going in the future it is inevitable that prices will be dropping again following these economic times. Plus bank loans are already tightening up so buy a new house with a mortgage will be more and more difficult (which will drive prices down.) Because both my husband and I have been real estate brokers for 35+ years we are almost positive it will result in lower prices so if people are looking to buy…hold off. If you want to sell…do it now or you will likely be riding that lower wave for several years to come. Oh, and all of our investments are in free and clear real estate…no matter what happens, people need a place to live so we feel that income is fairly reliable even if we have to lower it to accommodate good tenants. And the freedom and peace of mind that comes from it all? PRICELESS!

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    1. Our utility and insurance costs average just under $300/month for our 2,000 square foot home. If your $500 includes all other expenses you are doing very, very well). Real estate taxes in Arizona are below average, especially compared to California, New York, or most East Coast states.

      After 35+ years in Arizona, we are not going anywhere. Our whole family has committed to being here, so life is good.

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  9. We paid off our mortgage last year and added solar panels to keep utilities low. We're not financial wizards. It just feels good to know we can live on our current cash flow and not suck the retirement savings dry.

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    1. If you can live below the growth percentage of your investments you have done an outstanding job. Living on current cash flow is a worthy goal for everyone.

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  10. Bob, I did not try to pay off my mortgage prior to retirement. A couple of years earlier I had refinanced the loan and taken the term from a 30 year to a 15 year mortgage at a much lower interest rate, and I was comfortable with monthly payment. After a few years in retirement I did decide to increase my monthly payments in order to pay off the mortgage even earlier. I did not make any heroic efforts in order to close out the mortgage in one, two or three years, I just started adding a couple of hundred dollars each month, then a little more and then still more. I tended to look at the extra payments as a proxy for investing in fixed income securities. When the mortgage was finally paid off, I didn’t feel like some major burden had been lifted from me, but it was still satisfying to have the title clear and in my name.

    SEPARATE TOPIC:
    You mentioned that your long term plans include eventually moving to a Continuing Care Retirement Community (also called Life Plan Communities). That was a topic that I had researched a couple of years ago, and I also came to the conclusion that a CCRC would be the right answer for my wife and I. You might consider reviewing the decision process that you went through and the pros and cons of CCRCs as a future post….or perhaps a series of posts. I would personally be interested in what your thoughts are on “When is the right time to move into a CCRC?”. That is the question that I am currently trying to figure out for my wife and I. The quote that I have seen used several times is that when deciding when to move into a CCRC you “don’t want to arrive 5 years too early or 5 minutes too late.”

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    1. Good idea for a future post. It is not an easy decision because timing is so important.

      I will write something soon. Thanks for the idea.

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    2. Rick, I like your quote about deciding when to move into a CCRC “you don’t want to arrive 5 years too early or 5 minutes too late.” Last year my mother (age 90) moved into a retirement home after a fall in her condo. Essentially the doctors wouldn't send her home from the hospital to live on her own. My mother should have moved into a retirement home 2-3 years earlier but my sister (who lived near my mother and was the main caregiver) would say "But mom seems okay right now". What I tried to tell my sister was that you are okay on your own until you're not and "you're not" happens all at once. Then, as was the case with my mother, you are scrambling to find a suitable place RIGHT NOW which is not the best scenario.

      Looking ahead having to make a rushed choice for my wife and me is something I want to avoid but the decision on timing is a tough one and worth a discussion.

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    3. ddavidson5647 yes, timing is a critical question for a move to any type of retirement community, but for people planning to move to a Continuing Care Retirement Community it takes on even more importance. Since the majority of full service CCRCs require that new admission residents be fully capable of independent living, and some may also require a pre-admission physical exam, delaying the move and then being diagnosed with a chronic disease or having a debilitating accident could cause a person to be rejected for admission.

      But even if a person isn’t planning on moving to a CCRC, the situation that you mentioned with your mother is always a concern. While a person is still living at home and doing “OK”, they always think that there is no rush, they can make a decision next summer or next year. Then they face an illness or an accident and all of a sudden they need a place to go tomorrow…..and there is no time to make a thoughtful, informed, well researched decision. And it is a decision that is probably the most important decision of the rest of your life.

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  11. We paid off our mortgage ... so I guess that tells you my opinion. Question: Where do you go that money "will be invested for safe growth" -- I didn't know there was such a thing!

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    1. I didn't either. Lydgate has discovered something that I wish she would share!

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  12. We paid off our mortgage last year. Before then, we had that portion of our money (the amount left on our mortgage, plus some) invested and set up an automatic payment. Since the stock market continued to rise, we came out very much ahead and didn’t have to think about a monthly payment. When the tax laws changed to make having a mortgage less advantageous, we decided to pay it off. It worked out well for us and I’m happy to now own our house free and clear. We’ll probably be here for a while.

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    1. Living without a mortgage just feels so satisfying. I do not regret our decision to be mortgage free at all.

      But, as the comments show, it really is a personal choice.

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  13. We still had a couple years on our mortgage when I retired (quit an awful job). It made me quite nervous for a while, but I just accepted it over time. Then we decided to trade a paid off house for a new condo. Needless to say, the market during the Covid shutdown was a roller coaster ride, but the day the real estate lockdown ended we had showings again and actually had two offers the next day. So we are within 10 days of closing the sale of this house, and the builder claims they will be finished in time for our move in . Yikes, it's stressful. But so far, it's all moving forward. We will both sleep better once we have it all finished. And no mortgage. Woo hoo!

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    1. Fingers crossed for you! Real estate deals can raise someone's blood pressure quicker than most anything else. But, no mortgage...worthy of a celebration.

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  14. My house didn’t cost more than an averaged priced car. I am still working, and it is convenient for work, which is why I bought it, and it was paid off a while ago. However, I don’t want to live here when I retire. Of course, I don’t know where I want to live retirement life so I will stay put until I figure it out. Plus, I really am cheap....lol.

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    1. Well, that summarizes our dilemma: we own where we live, we like where we live for now, but we know we have to move at some point. What to do.

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  15. We just paid off our mortgage in 22 yrs!! In our early 70's & my anxiety is now gone! Able to live within our means & still able to save. So thrilled!!

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    1. Double fist pump from me to you! It does feel wonderful to know you are finally the only title holder to the property.

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  16. Having a paid off house when you reach retirement has long been a solid foundation for a successsful retirement. Save for a few, most strive to be debt free by the time they reach retirement (as many have posted here). Being debt free is not 100% necessary for a successful retirement but it simplifies things and takes financial pressure off. Your income or investments can go down but debt stays the same and the bank expects their money regardless of your financial situation.

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    1. One more point I wanted to add... I look at my house as a place to live not as an investment. You have to live somewhere and if you were to pass away while still in your home (and most of us do) you never realize "investment gains" from it anyway. But you did have a place to call home.

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    2. We count on the 100% equity in our home to help us cover the entrance fee into a CCRC at some point. But, we have never thought of our home as a piggy bank. We have been lucky in that the last three moves have been when housing prices are solid. So, yes, where we live is home. It is a place to shelter us and make memories, not to bet on the rise or fall of the market.

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  17. The peace of mind of a paid off mortgage is priceless to me! We paid off our mortgage early and the very next month my husband was given an early retirement (unplanned). He had planned to work at least another year. I still work because I like my job and life went on for us pretty much as it had when he worked because of the reduced expenses. We have very low property taxes. Our 4,100 square foot home in the country is only 10 years old and with a steel roof and siding is very low maintenance and energy efficient. It is also all on one-level so no stairs as we age. No water bill because we have our own well that we use for everything but drinking water. We plan to stay there as long as we are able. We will both have good retirement income when my job does end and have managed to save enough for a comfortable life besides. However, if we had a large mortgage, it might be a different story. I think reducing your bills as much as you are able is just as important as saving more. We have greatly reduced our spending for entertainment, eating out and buying things we want (but don't really need) during this pandemic. I think some of those changes will be a permanent. I wonder what changes others will make as a result of the pandemic as well?

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    1. I know we will keep some of the cuts we have made because of the stay-at-home situation. In the 20 years we have been retired we find, almost with each passing year, that there are fewer things we want to spend money on. We have also made a commitment to leave our kids with a decent inheritance, which helps us stay on track.

      Not having a mortgage as been a very important part of our retirement planning and strategy.

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  18. Hi Bob. We, also, paid off our mortgage last year. I am 65, my husband 62. We are both still working but plan on retiring as soon as we can sell our small business. Not so easy now with the economy. But, the peace of mind we feel with our paid for home is priceless, especially with the market the way it is. We will not stay in this house when we retire for various reasons, but we have yet to decide where it's best for us to go. We have enough investments and savings to carry us through a modest but safe retirement, even without the sale of our small business, so our home equity will be our payment for our new home wherever we land. So, I'm in the camp of paying off the mortgage and all debt before retiring. One just never knows what life is going to throw at you, and with a paid-for home, you know you have some independence and a place to lay your head at night.

    I would also like more info- on a CCRC, and thoughts about the comments on when is the best time to consider to move. A lot of useful information in your blog...thanks for that.

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