For many, 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.
But not all debt is equal. Interest rates have been historically low recentely, so depending on your rate, your mortgage may be the cheapest form of debt you hold. 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, five 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 saved. If you 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 to tax-advantaged accounts. If you still have room to save, you may want put any additional funds there.
- 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 lose that deduction. If the availability of that deduction benefits you then you may want to continue paying interest. Keep in mind that it’s important to view your financial situation from a complete perspective before making any tax decisions.
- 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 your finances. You should aim to have at least 3 to 6 months of cash reserves on hand to cover major expenses without having to liquidate investments or go into debt. If you don’t have an emergency reserve or need to save more, consider boosting that before paying down your mortgage.
- Do you have other debt? The average person in the U.S with debt holds at least $38,000 (excluding mortgages), and 45% of retirees carry non-mortgage debt. If this is you, and 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.
5. 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.
Choosing to pay off a mortgage requires looking carefully 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.
Courtesy of Diamond State Financial Group. 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 Platinum Advisor Strategies, LLC, and not necessarily those of the named representative, Broker dealer or Investment Advisor, and should not be construed as investment advice. Neither the named representative nor the named Broker dealer or Investment Advisor 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. Opinions expressed are subject to change without notice and are not intended as investment advice or to predict future performance.