5 questions to ask before paying off your mortgage before retirement
Retiring without a mortgage might seem like a dream, but is it really a smart financial decision? With record interest rates, could your money be better spent elsewhere? While reducing your cost of living in retirement is often a smart move, ask these five questions before rushing to pay off your retirement mortgage.
I just spoke on the phone with a 60 year old man who was so excited he had just paid off his million dollar house in Palm Springs. To accomplish this critical challenge, he stopped contributing to his retirement accounts. Worse yet, he had accumulated credit card debt in the process. Paying off the house will improve his retirement, but he probably could have come out much further if he had used his money better in recent years.
Where will you get the money to pay off your mortgage?
Suppose you bought a house years ago and made the standard payment, which ultimately paid off the house. Congratulations! Many people have refinanced over the years and often spread their payments out over a longer period of time than a typical 30-year mortgage involves. If you are nearing retirement and thinking about making a lump sum payment to get rid of your mortgage, you must ask yourself, “Where will the money come from to pay off the mortgage?” “
If you have $ 10,000 and you have it in a checking account, go ahead and pay off the mortgage. On the flip side, if you owe hundreds of thousands of dollars and have to loot retirement accounts, think carefully before making a taxable withdrawal to pay off your mortgage. If you are still working, the withdrawal will push you into higher tax brackets. In many cases, the higher taxes could more than offset the mortgage savings you think you’ll get.
Just in case you were wondering, interest rates were over 9% in 1991 (30 years ago). Those with good credit could probably find a mortgage of less than 3% today.
Could the money earn more elsewhere?
The stock market has soared during most of the coronavirus pandemic. Housing prices have also skyrocketed. Heck, even used cars are worth more today than they were two years ago (on average). You don’t have to get fantastic returns on your investment to beat mortgage rates, especially when you consider the after-tax cost of your mortgage. (If you get a tax deduction for your mortgage interest, keeping your mortgage costs you less at the end of the after-tax day. It wouldn’t be difficult to build an investment portfolio that you could reasonably expect to earn more than $ 3. % per year over the long term.
If you are adamantly against investing (a big mistake in my book) and the money will simply be deposited into a checking or savings account, then it would probably make sense to be more aggressive in paying off your mortgage. If you were to withdraw money from investments (which would likely result in capital gains taxes), I would think long and hard before making a big lump sum payment on your mortgage.
Can you deduct your mortgage interest?
If you only get the standard deduction, you don’t get a tax deduction for your mortgage interest. If you itemize when filing your taxes, I assume you are taking the mortgage deduction. Tax deductions for mortgage interest make maintaining the mortgage even cheaper after tax.
Homeowners in high-tax states with high property values are much more likely to itemize their taxes. Think of owners in Los Angeles, San Francisco, or New York. The higher your income, the more attractive the mortgage deduction can be.
Can you get a HELOC now?
Once you retire, getting a new mortgage or even a HELOC can be much more difficult. If you paid off your mortgage before you retired, it might be a good idea to set up a HELOC even if you don’t plan to use it. If you own a home long enough, you may need to do some expensive maintenance. The air conditioning, washing machine or roof won’t last forever. A HELOC can give you some flexibility so you don’t have to make a large withdrawal from your retirement accounts when the stock market is down, or maybe, in a year, you already find yourself in a high tax bracket. .
Can you get another mortgage if needed?
Once you’re retired, getting another mortgage can be difficult. This is one of the reasons I often advise clients to try and buy their retirement home before officially retiring. You might have millions in an investment account, but the bank wants to see income. In the case of a retiree with millions, that person will likely still get a mortgage and likely still be limited on the amount that can be borrowed while being hit with higher mortgage costs and interest rates.
To be true, most retirees don’t have millions in an investment account; before rushing to pay off your mortgage, make sure that you won’t need to access the equity in your home for a while.
In a perfect world, we would all have paid for our homes when we retire, with adequate income streams to fully sustain our pre-retirement lifestyles. I don’t think I’ve ever met someone who bought a house and made 30 years of payments to pay off their original mortgage. (It wouldn’t have been a smart move with the interest rates falling over the past 30 years.) Still, I know many people who paid off their mortgages earlier and others who are on the right track. way to do it. Paying off your mortgage can be a great financial decision, but it probably won’t be the best financial decision for your retirement.