For most, reaching the financial milestone of being debt-free usually doesn’t include paying off their mortgage. But for some who have put in the hard work, saved as much as they could, and perhaps even had a nice dose of good luck, they may be wondering if they should pay off their home before retirement.
However, unlike establishing an emergency fund or creating a financial plan, there isn’t a one-size-fits-all answer to the question of whether you should pay off your mortgage. In fact, the right answer for each family can depend on a number of key factors that you should discuss with your family and a trusted financial advisor.
To help you start thinking through the decision and shape the conversation, here are some key questions to consider.
What is your tax situation?
Although there are a lot of factors to consider to discuss with your personal accountant and financial advisor, one of the biggest questions related to paying off your mortgage before retirement will be whether you are willing to lose access to the valuable mortgage interest deduction.
For example, based on current federal tax law, if you bought your house after Dec. 15, 2017, you can deduct the interest you pay on the mortgage loan up to a loan amount of $750,000. According to one analysis, on a loan of $500,000 at a 3.0 percent fixed interest rate and a personal tax rate of 24 percent, you could be missing out on $3,566 in tax savings each year.
How will you pay off the remaining balance?
Next, if you make the decision to pay off the mortgage early, it is vital that the move doesn’t make you cash poor. Similarly, if you have other current or potential high-interest debt, you should consider paying those liabilities off first.
We always recommend having 3-6 months of savings set aside for emergencies, so if you have sufficient emergency funds as well as other funds that aren’t tied to retirement, you may be in a position to consider paying off your remaining principal.
How much are you currently saving for retirement?
Even if you are in a good financial position now to think about paying off your mortgage faster, you still need to think about your future retirement needs.
In particular, if you aren’t currently maximizing your employer-matched retirement contributions, you are missing out on a tax-free way to increase your future retirement income.
How does your interest rate compare to your investment returns?
This question can be a bit complicated and could require the input of a financial professional for help, but for some, it can be a big difference.
If the cost of your mortgage interest rate is less than you are earning by investing the money that you otherwise would be using to pay off your mortgage, not investing that money could mean you’re leaving money on the table.
What do you envision for your retirement?
If you plan on downsizing, traveling, or moving to a new area during retirement, paying off your home may be a bit premature. Instead, wait until you and your family decide for sure how and where you will be spending your retirement years so you have the financial resources you need to support your new lifestyle.
Connect with a trusted advisor.
If you are in a position to consider paying off your home’s remaining mortgage, you are in an enviable place that many would love to be in.
However, even in this position, it is still important to make a logical decision, not an emotional one. In this case, you should do the math—now and for the future—so you can be sure you are making the right decision. Consider going over your work with a trusted financial advisor like the ones on the Harvest Wealth Group team.
If you are interested in maximizing the moments that matter in your life, we would love to share our free guide, Creating a Personal Financial Plan to Help You Reach Your Money and Life Goals, and to set up a time to meet and talk with you about your goals for the future.
About the Author
Garrett German* founded Harvest Wealth Group with the aim to create a meaningful experience that will impact his clients, in a significant way, both personally and financially. After your first meeting with our team, you’ll be on your way to financial clarity and confidence.