In this week’s case study, the “Money Talks” hosts discuss the decision of paying off their mortgage before retirement. Our case follows a couple who are four to five years from when they want to retire with nine years left on their mortgage. They’d be willing to work two to three additional years to pay off their home shortly after they retire and spend their retirement without mortgage debt.
Paying off your mortgage before you retire is an emotional decision that many people consider. There is a comfort of going into retirement without your largest debt hanging over your head—figuratively and literally! Unfortunately, many couples who make the decision to sleep better at night knowing their debt is paid off become house poor. While they have a glorious home that they own, they have very little cash flow in retirement.
This couple may assume if they need to supplement cash flow later in retirement, they could borrow against their home. However, if we enter another bear market and cycle of depressed home values, their asset may not be worth as much, and banks may not be willing to lend. The alternative is not just about getting a lower interest rate but their future liquidity.
Looking at this from a purely financial standpoint, the case study couple has a current mortgage balance of more than $200,000 at a 5.27% interest rate, making their monthly payment more than $2,500. The mortgage is based on the much larger amount borrowed when they purchased the home. With today’s rates considerably lower and the equity in their home, refinancing could save nearly $1,700 a month.
If they were to refinance the home with a 30-year mortgage at 3.65%, and invested $1,700 a month over the next nine years, assuming they earn an 8% return, they could have around $267,000. At that time their mortgage balance should be around $166,000.
Ideally, the smartest option is to enter retirement without a high cost of living, meaning they should pay off consumer loans, credit cards and car loans. One benefit that comes with owing on a mortgage is the interest deduction on your taxes. You can generally deduct the interest that you pay on debt resulting from a loan used to buy, build, or improve your home, provided that the loan is secured by your home.
Most people retire around age 65 and live to around 82. While it may be comforting not to owe on your home, we recommend having a financial professional run the numbers for you to make sure paying off your home will not harm you by putting you in a situation where you are house poor with little cash flow. While the home is a considerable asset, it won’t buy the groceries or pay the electric bill.
If you have questions regarding how carrying a mortgage in retirement may affect your overall financial situation, experts at Henssler Financial will be glad to help:
- Experts Request Form
- Email: experts@henssler.com
- Phone: 770-429-9166.
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