Pay Off Your Mortgage Before You Retire?
Summary: Retiring with no monthly mortgage payment sounds like a good financial plan, right? Usually. But there are times when not rushing to pay off your mortgage balance before retirement makes financial sense. Click through to know what’s right for you.
For many people nearing retirement age, it makes financial sense to pay off their mortgage loan balances before they leave the workforce. Some homeowners approaching retirement will make extra payments or add an extra amount with each monthly payment to erase their home loan’s balance before they retire.
That way, they can retire with one less monthly debt. That makes it easier to stretch a fixed income. A mortgage payment is the largest monthly expense for many people. Eliminating it before you retire can bring you peace of mind.
Paying off a mortgage also eliminates the interest payments that come with home loans. That can mean an additional source of monthly savings.
When does not paying off your mortgage before retirement make sense?
There are at least three situations, though, when paying your mortgage off before you retire may not be the best financial move. It depends on your personal financial situation.
1. If you haven’t saved enough money to be comfortable in retirement.
Rather than spend your last few working years paying extra to reduce your mortgage loan balance, you should instead divert any extra cash into your retirement accounts.
Remember, the more money you have in these accounts, the faster your balances in them will grow. If you are approaching retirement without having saved enough money, boosting these savings should be your top financial priority instead of paying down your mortgage loan balance.
2. If you are saddled with a significant amount of credit card debt.
Instead of devoting extra money to your mortgage payment, use this cash instead to pay down your credit card debt.
Why? Credit card debt comes with high interest rates, often as high as 29%. These high rates cause this debt to grow quickly if you don’t pay it off in full on or before your cards’ payment due dates. If you focus on paying off this debt, you’ll save more money in the long run because mortgage debt comes with far lower interest rates.
3. If your mortgage loan’s interest rate is especially low.
This might be the case if you took out a home loan before 2022. In this case, it might make more sense to continue to make your regular mortgage payments and invest any extra cash in investment products.
That’s because you could potentially earn a higher return on these investments, such as investing in stocks, than you’d save by paying off a mortgage loan that might have an interest rate as low as 3%.
Taking this approach does require some risk tolerance, though. There is no guarantee that any investment will earn high returns. And you’d have to be comfortable continuing to make your mortgage payments even after you retire.
Before making any mortgage decision, study your financial situation. Only then should you decide whether it makes more sense to pay off your mortgage before retirement or carry those payments into your post-working years.
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