Is Paying Off a Low-Interest Mortgage a Good Idea?
For many families, a home loan constitutes a significant portion of their household debt. As a result, some people choose to reduce this debt as much as possible before entering retirement. In fact, nearly one in three retirees have mortgage debt, and 17% of those paying off debt say that their mortgage is a top financial priority.[1]
But, not all debt is equal. Interest rates have been historically low in recent years, so depending on your rate, your mortgage may be the cheapest form of debt you hold.[2] As such, using your extra money in different ways could make sense. Because everyone’s financial situation is different, many factors can affect choosing whether to pay off your mortgage.
As you assess your own mortgage, here are 5 common questions to consider:
- Have you maxed out contributions to tax-advantaged accounts?
Preparing to have the income you need in retirement is important – yet, only 46% of retirees believe they have enough money.[3] If you and your financial representative feel comfortable with your retirement savings, you may be able to devote income to extra mortgage payments. However, the final years before retirement are your last opportunity to boost your contributions. If you still have room to save, you may want to bypass paying off your mortgage and put those additional funds into tax-advantaged accounts.
- Will paying down the mortgage affect your taxes?
If you itemize your taxes, then your mortgage interest payments may be deductible. Once you stop making mortgage payments, you can no longer deduct that interest. Further, choosing to pay off your mortgage, either before or after you retire, also brings a different set of tax strategies to consider. If you can still benefit from deducting interest on your taxes, then you may want to continue doing so. Keep in mind that it’s important to view your financial situation from a complete perspective before making any tax decisions.[4]
- Do you have adequate cash reserves?
Emergency savings are critical for an effective, long-term financial strategy. Unexpected life events, like unemployment, a sudden illness, or home repair, can strain household finances. To adequately prepare, you should aim to have at least 3 to 6 months of cash reserves on hand.[5] By doing so, you’ll be better able to cover major expenses without having to liquidate investments or go into debt. If you do not already have an emergency reserve – or need to set aside more money – consider boosting your savings before paying down your mortgage.
- Do you have other debt?
People in the U.S. are carrying lots of debt, which can threaten their financial strategy. In fact, the average person with debt holds at least $38,000 (excluding mortgages), and 45% of retirees carry non-mortgage debt.[6] If you find yourself in a similar financial situation, you may want to put extra money toward other debt. Further, if any of those liabilities have interest rates higher than your mortgage, then you’ll keep more money in the long run by paying down that debt today.
- Will paying off your mortgage bring happiness?
Most financial decisions have emotional components, which is why understanding your long-term goals is important when making a strategy. For some people, knowing that they own their home, free and clear, outweighs other financial considerations. If being able to pay off your mortgage early aligns with your financial goals, it may be the best decision for you.
The Takeaway
Choosing to pay off a mortgage requires carefully looking at your financial life and prioritizing which strategies make sense. With careful attention to your unique needs, you can make sound decisions that support your long-term goals. If you have any questions or would like to discuss this topic further, I’m happy to help you clarify the opportunities available to you.
Footnotes, disclosures, and sources:
As part of the 2017 Tax Cuts and Jobs Act, mortgage interest deductibility is limited to mortgages up to $750,000 in principal value.
These are the views of Iconic Wealth Management LLC, and should not be construed as investment advice. Neither the Stephen D. Memery nor Iconic Wealth Management LLC gives tax or legal advice. All information is believed to be from reliable sources; however, we make no representation as to its completeness or accuracy. Please consult your financial advisor for further information.
We have not independently verified the information available through the following links. The links are provided to you as a matter of interest. We make no claim as to their accuracy or reliability.
Opinions expressed are subject to change without notice and are not intended as investment advice or to predict future performance.
[1] https://www.transamericacenter.org/docs/default-source/retirees-survey/tcrs2018_sr_retirees_survey_financially_faring.pdf
[2] https://www.thebalance.com/fed-funds-rate-history-highs-lows-3306135
[3] https://www.transamericacenter.org/docs/default-source/retirees-survey/tcrs2018_sr_retirees_survey_financially_faring.pdf
[4] https://www.thebalance.com/mortgage-interest-deduction-before-and-after-retirement-2388985
[5] https://www.investopedia.com/terms/c/cash-reserves.asp
[6] https://news.northwesternmutual.com/planning-and-progress-2018