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Don’t assume that paying off your home ahead of retirement is the right move. Learn why this decision should hinge on what your mortgage is costing you. [[{“value”:”
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Many people worry about retirement from a financial standpoint. After all, it’s hard to go from living off of a steady paycheck to living off of savings.
Meanwhile, the conventional advice given to older homeowners with mortgages is that it’s best to have those loans paid off ahead of retirement. The logic is that many people see their income shrink once retirement kicks off. So it’s best to shed as many debts ahead of that period as possible.
But while “pay off your home ahead of retirement” may have been the classic advice for many years, it’s not necessarily great advice today.
It’s a matter of what your mortgage rate looks like
The average mortgage rate as of this writing is 6.82% for a 30-year loan, says Freddie Mac. But in 2020 and 2021, mortgage lenders were practically giving loans away in the wake of a pandemic-fueled economic crisis.
Back then, borrowers with good credit could snag a 30-year mortgage at or under 3%. And not surprisingly, many homeowners took advantage of the opportunity to refinance their mortgages while rates were down.
As such, a lot of older homeowners today are no doubt sitting on super low mortgage rates. And if you’re in that boat, then you actually probably shouldn’t try to pay off your home before retirement begins.
Let’s say you owe $50,000 on your mortgage and have that money in savings. You may decide to raid your cash reserves and get rid of your mortgage before your paycheck from work goes away. But if you’re paying, say, 3% on your mortgage, that hardly makes sense at a time when high-yield savings accounts are paying APYs of 4.00% and higher.
Furthermore, if you can afford your mortgage payments as a retiree, then it’s actually best not to tie up extra cash in your home. You never know when a need for money might arise, whether it’s to cover a medical bill or fix your car. If you pay off your mortgage, you’ll have that much less liquid cash available when these things come up.
Also, if you can afford your monthly mortgage payments as a retiree because of your low interest rate, you can invest the money you’d otherwise use to pay your balance off. So let’s say you invest $50,000 instead of paying off your loan balance. Even if you were to generate a relatively conservative 6% return on that money, in five years, you’d grow your $50,000 to almost $67,000. Why not do that if your mortgage isn’t a burden?
You don’t always have to follow class advice
Sometimes, classic advice becomes so ingrained in us that it’s hard to think outside the box. But in the context of mortgages, paying off your home before retirement may not make financial sense if your loan’s interest rate is low and you can earn more money in a risk-free savings account.
Of course, you might argue that not having housing payments in retirement will bring you peace of mind. And there’s certainly value in that.
But hanging onto a bunch of your cash instead of pumping it into your mortgage might do the same. So consider the pros and cons of both approaches before making your decision.
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