Should You Pay Off Your Mortgage Before Retiring?

Peter Richardson is a vice president of planning excellence for Northwestern Mutual.

Being mortgage-free certainly has its perks, especially in retirement. Not being responsible for those monthly payments can free up more income to enjoy a comfortable lifestyle as a retiree. But that doesn’t always mean you should pay off your mortgage before you retire.

Prioritizing your mortgage over other financial goals will depend entirely on your unique financial situation. So what should you pay off before you retire? The answer depends on your long-term goals.

Prioritizing debt payments vs. retirement savings

It usually makes sense to prioritize high-interest debt. That’s because these accounts cost you the most money. While compound interest is great as an investor, it can be a killer if you’re carrying a lot of debt. This is why it may feel more urgent to pay off a credit card with a double-digit interest rate over a 3-percent home loan. (Bringing any delinquent accounts into good standing should also be a top priority since they can negatively affect your credit health.)

If you have a low-interest mortgage, instead of using extra income to accelerate repayment, you might choose to shore up your retirement savings. Tax-advantaged accounts like 401(k)s and IRAs can help you grow your nest egg at a faster clip, especially if you have access to an employer match. This could allow you to enter retirement in a much stronger financial position, even if you still have some debt.

Of course, it isn’t just about dollars and cents. Choosing whether to prioritize debt payments or retirement savings also comes down to your own peace of mind and personal values.

Pros and cons of paying off a mortgage before retirement

Getting rid of your mortgage before your golden years has its benefits and drawbacks. Consider the following before deciding what’s best for you.

Pros of paying off your mortgage before retirement

• You’ll cut a large monthly payment from your budget.
• Paying off your mortgage early means saving on interest charges.
• You'll own your home free and clear, though you’ll still be responsible for paying property taxes and homeowners insurance. And you might have to keep paying homeowners association fees or condo fees.

Cons of paying off your mortgage before retirement

• Prioritizing your mortgage over high-interest debt could cost you more in the long run.
• You might put retirement savings on the back burner, which could come back to bite you when you stop working.
• You might secure stronger financial returns by keeping your mortgage and investing in low-risk assets like bonds, CDs or annuities.

When you may not want to pay off your mortgage early

You might question whether it’s smart to pay off a house before retirement. Everyone has their own unique financial goals and money management style. There are some scenarios when retirees may want to hang on to their mortgages. This could include:

• You haven’t maxed out your retirement savings for the year: 401(k)s and traditional IRAs allow your money to grow on a tax-deferred basis. You can also secure tax-deductible contributions during your working years. Roth IRAs have benefits of their own and generally allow for tax-free withdrawals in retirement. These tax-advantaged accounts are often essential to creating steady retirement income.
• You’re eligible to make catch-up contributions. If you’re 50 or older, you can put extra funds into a 401(k) or IRA. Those who are 55 or older can also make catch-up contributions to a health savings account (HSA).
• Making extra mortgage payments would deplete your cash savings: A strong emergency fund goes hand in hand with financial wellness. It can help you take advantage of an opportunity and get you through an emergency. Many financial advisors suggest setting aside three to six months’ worth of expenses in a high-yield savings account—and more in retirement.
• You’ll need to cash out your retirement funds to pay off your mortgage: Taking money out of the market can rob you of future investment returns. You’re also dipping into your nest egg, which is meant to provide income when you’re no longer working.
• Your mortgage rate is lower than the returns you’d get with a low-risk investment: Let’s say your home loan has an interest rate of 3.15 percent. Instead of making extra mortgage payments, you might put that money into a low-risk investment, such as a certificate of deposit (CD) that pays 4.5 percent. While it may be possible to get stronger returns with higher-risk investments, it’s often advised to dial down risk as you approach retirement.
• You have higher-interest debt: If you have credit card balances, a car loan or any other high-interest debt, those costs can add up quickly. Putting them first will likely make better financial sense.

When you might want to pay off your mortgage early

Some soon-to-be retirees may choose to pay off their home loan ahead of schedule. That might be a sound financial move if any of the following are true:

• Your mortgage rate is higher than the interest on your other debts: Mortgage interest can add up to a huge expense over time, especially if your rate is on the higher side. Paying off your loan could save you a significant amount on interest.
• Your mortgage rate is higher than what you can reasonably expect to make with investments: If you have a mortgage rate of 6.5 percent, you may have a tough time finding a low-risk investment that can guarantee that high of a return.
• You have a high mortgage payment: If your loan payment takes a big bite out of your monthly income, paying it off can be a huge financial relief. You’ll also have peace of mind knowing that you won’t have a mortgage payment in retirement.
• You have the money available and want to be debt free: If paying off the mortgage won’t hurt your ability to create income in retirement and you’d like to be free of the debt, then it might make sense to pay off your mortgage.

Alternatives to paying off your mortgage before retirement

After weighing the pros and cons of paying off a mortgage, you might decide to keep your home loan around for a while—but that doesn’t mean you can’t find ways to save money. You might consider one of the following strategies:

• Refinancing your mortgage: This involves taking out a new home loan that may have a lower interest rate and more affordable monthly payment. Just be aware that refinancing comes with lending costs.
• Downsizing: If your monthly mortgage payment feels like a burden, you might consider selling your property and moving to a more affordable home.

There isn’t one right or wrong answer to whether it’s good to pay off your mortgage early. The best approach for you will depend on your unique situation. Talking to your Northwestern Mutual financial advisor can help you understand the pros and cons and come up with a plan that makes the most sense for your retirement goals.