7 Reasons Not to Pay Off Your Mortgage Before Retiring

7 Reasons Not to Pay Off Your Mortgage Before Retiring
Photo by New Africa / Shutterstock.com

Paying off a home mortgage before you retire is a common goal, but it isn’t always the best financial strategy.

It could end up costing you in the long run — such as by leaving you without cash savings to cover an unexpected expense or without the flexibility to take advantage of an opportunity to earn a better return on your money.

What follows are some financially shrewd reasons to carry your mortgage debt into retirement.

1. You plan to sell your home

Many people decide to downsize before or in retirement. They find that a smaller, less expensive home better fits their retirement lifestyle, as we detail in “7 Unexpected Benefits of Downsizing in Retirement.”

If you think you may be selling your home soon, think hard before you pay off the mortgage on your current home. That’s because selling your dwelling may give you the money you need to repay your home loan without having to deplete your savings.

2. You plan to rent out your home — or a room

Does your retirement plan include relocating and renting out your present home? There’s no pressing need to pay off your home loan if the tenants’ rent payments will cover your future mortgage costs.

You could avoid tapping into your savings to pay off the loan. You may even realize a profit after your mortgage bill is paid each month.

That could be true even if you remain in your home and simply rent out a spare room through a vacation rental site like Airbnb.

A 2018 analysis by Homes.com found that in some cities, a homeowner could make enough money by renting out a room just four or five nights per month to cover a monthly mortgage payment. We detailed the analysis findings in “Do This a Few Days Each Month and Watch Your Mortgage Disappear.”

3. It’s more important to repay debts with higher interest rates

Before you commit to paying off a mortgage, determine whether there are better ways to spend your money.

For example, if you’ve purchased or refinanced a home in the past decade, your home loan likely has a relatively low interest rate. And if that’s the case, you will be better off financially if you first repay debts with higher interest rates, such as credit cards debt.

Paying off the debt with the highest interest rate first will save you more money in interest payments over the life of your debt.

4. You’re still saving for retirement

Not everyone completes their career with enough money to enjoy a comfortable retirement. That’s why many Americans continue to work after age 65, the traditional retirement age.

If you’re contributing to a retirement account, such as an IRA or a 401(k), it may make more sense to use any extra money you have to build your retirement savings rather than to repay your mortgage ahead of schedule.

Retirement accounts are tax-advantaged. So, saving money in one will likely enable you to lower your taxable income now or avoid taxation when you withdraw funds from the account in retirement, depending on whether the account is Roth or traditional.

To learn more, check out “Confused by Retirement Accounts? Roth, Regular IRAs and 401(k)s Made Simple.”

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