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.