If you’re approaching retirement and still carrying a mortgage, you’re likely to wonder which approach makes more sense:
1) Dip into your savings and pay off your mortgage, entering retirement without a house payment; or
2) Keep making your regular payments even after you retire, and hang on to your nest-egg.
The answer depends on a number of factors, not the least of which are the size of your mortgage and the amount you have saved.
Before you decide to write a payoff check to the mortgage company, what you’ll want to consider first and foremost is how much you’ll have left in savings if you choose to pay off your mortgage. If having no house payment would also mean having no emergency fund, you’re probably wiser to stick with the house payment. It’s essential to have extra funds available to cover those unexpected home repairs or other surprises, and the last thing you want to do once you’ve retired is to start taking on credit card debt to cover day-to-day expenses.
If you’ve determined that you can pay off your mortgage and still have a comfortable amount of savings in the bank, but you’re still on the fence, you may want to consider a couple of other factors.
Can Your Nest Egg Out-Earn Your Mortgage Interest?
Take a look at how much your savings and investments are earning you right now. Your rate of return depends on your investing style, and on the market. Now, compare this rate of return to your mortgage interest rate. Assuming you have the funds to do it, one way to decide whether to pay off your mortgage is to consider whether your savings and investments are likely to out-earn your mortgage interest rate.
Will The Mortgage Interest Deduction Really Benefit You?
Many people are quick to look to the income tax deduction that comes with a mortgage as a reason for hanging onto their house payment. However, you’ll want to carefully analyze your financial picture to see if the deduction will truly benefit you. After you retire, your income is likely to drop, lowering your tax rate. This means your deduction will have less of a bite. Plus, retirement can mean a loss or reduction of certain itemized deductions. The home mortgage interest deduction only benefits you if your total itemized deductions outweigh your standard deduction.
Ultimately, deciding whether or not to pay off your mortgage prior to retirement is a very personal choice, and it depends on your individual financial circumstances. It’s a good idea to seek the advice of a trusted professional in making this decision.
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