2-Minute Money Manager: Should I Pay Off My Mortgage Before Retirement?

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Welcome to the “2-Minute Money Manager,” a short video feature answering money questions submitted by readers and viewers.

Today’s question is about mortgages; specifically, whether you should pay off your mortgage before you retire.

Watch the following video, and you’ll pick up some valuable info. Or, if you prefer, scroll down to read the full transcript and find out what I said.

You also can learn how to send in a question of your own below.

For more information, check out “7 Times When You’re Smart Not to Pay Off a Mortgage Early” and “2-Minute Money Manager: Should I Use Savings to Pay Off My Mortgage?” You can also go to the search at the top of this page, put in the words “pay off mortgage” and find plenty of information on just about everything relating to these topics.

If you’re shopping for a mortgage, you can click here for rates from multiple companies. And if you need anything from a better credit card to help with debt, be sure and visit our Solutions Center.

Got a question of your own to ask? Scroll down past the transcript.

Don’t want to watch? Here’s what I said in the video

Hello, and welcome to your “2-Minute Money Manager.” I’m your host, Stacy Johnson, and this answer is brought to you by Money Talks News, serving up the best in personal finance news and advice since 1991.

Today’s question comes from Sara:

“I’ve always heard you shouldn’t retire if you still have a mortgage. But if I wait till my mortgage is paid off to retire, I’ll die at my desk. What should I do?”

OK, Sara, let’s discuss.

The first thing you should know is that entering retirement with a mortgage isn’t as rare as it used to be. According to the Consumer Financial Protection Bureau, about 6.1 million American retirees (about 30%), have a mortgage. It’s a number that’s been growing for years, which isn’t surprising considering homes have gotten more expensive while inflation-adjusted wages haven’t changed much.

So, the first thing you need to know, Sara, is that if you have to retire with a mortgage because you have no choice, do it. You’re not the only one.

But for those of you who do have a choice — you either have the savings or the income to pay off your mortgage before you retire — let’s look at the pros and cons.

Mortgage payoff pros

One advantage to getting rid of that mortgage is increased cash flow. Money you’re no longer putting toward your mortgage can now go into something more productive — like your savings or, better yet, making your golden years more fun.

Another advantage is not having that obligation over your head. Not only does it feel good, but should things go south, it’s one less bill to worry about.

Finally, if you’re earning less on your savings than you’re paying in mortgage interest, you’ll be better off paying down the mortgage. If you’re paying 4% percent on your mortgage and earning 2% at the bank, you’re going backward by 2% per year. Pay it off, and you’ll be gaining 2% per year.

Mortgage payoff cons

What are the disadvantages of paying off a mortgage? One is turning a liquid asset — money in the bank — into an illiquid asset, home equity. For example, a few years back during the housing crisis, I had a bunch of money in the bank earning very little. I used it to buy the house next door at a bargain price. I fixed it up, then sold it for a big profit.

Theoretically, I could have borrowed against my house to raise the cash, but I probably wouldn’t have. Because I had the cash and it wasn’t earning much, I did something with it that earned a lot.

In short, having money in the bank can help you make more money. Plus, it feels good to know that if things go south, or an opportunity arises, you’ve got the funds to deal with it.

Another thing to consider: You might get a tax deduction for your mortgage. This is harder to do now because the standard deduction for single taxpayers is $12,000 and $24,000 for married couples, so a lot of us are no longer getting a tax write-off for mortgage interest. Still, if you’re getting that deduction, it essentially lowers the cost of the interest you’re paying.

The bottom line

I’ve given you pros and cons, but what should you do? Well, it depends. Pay off your mortgage if:

  • You’ve got all your retirement accounts fully funded and you’re socking away as much as you can.
  • You’ve got a ton of savings that’s earning almost nothing.
  • You’re not getting a tax deduction.
  • You can’t see any future use for the cash.

On the other hand, you might be better off leaving your mortgage alone if:

  • You’re earning more with your savings than the mortgage is costing.
  • You’re getting a tax deduction.
  • You might find something rewarding to do with your cash.
  • You simply don’t have the money to pay it off.

Either could be the correct answer.

I hope that answers your question, Sara!

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The questions I’m likeliest to answer are those that come from our members. You can learn how to become one here. Also, questions should be of interest to other readers. In other words, don’t ask for super-specific advice that applies only to you. And if I don’t get to your question, promise not to hate me. I do my best, but I get a lot more questions than I have time to answer.

About me

I founded Money Talks News in 1991. I’m a CPA, and I’ve also earned licenses in stocks, commodities, options principal, mutual funds, life insurance, securities supervisor and real estate.

Got any words of wisdom you can offer on today’s question? Share your knowledge and experiences on our Facebook page. And if you find this information useful, please share it!

Disclosure: The information you read here is always objective. However, we sometimes receive compensation when you click links within our stories.

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