Should I Pay Off My Mortgage Early?

Risk, taxes and retirement considerations for mortgage payoff decisions

A study conducted by the Center for Retirement Research at Boston College concluded that “retired households are, in theory, better off repaying their mortgage.” Does that mean you should go cash in your investments to pay off your mortgage now? It depends, of course, on your individual situation. You need to factor in risk and taxes before making a decision to pay off your mortgage early. Below are resources to help you make a smart decision.

Paying Off the Mortgage Early - Pros and cons

A banker wants to give you a loan so they can charge you interest, and you get a home after the loan has been repaid!
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Paying off your mortgage is a guaranteed return because it lowers your interest expenses. Having low to no expenses leads to financial independence.

If you have the financial assets to pay off your mortgage early but choose not to do so, you are in effect choosing to invest with borrowed money.

Borrowing for a long term asset like a house and using other money to fund investment accounts would make sense if, after considering risk and taxes, the rate of return on your invested assets exceeds the interest cost of your mortgage. For example, if you can contribute to a 401(k) plan - and get a company match and a tax deduction - you would want to do that rather than using the money to pay extra on the mortgage.

The arguments for and against paying the mortgage early are addressed in more detail by clicking the link above.

Mortgage Interest Deduction Before and After Retirement

Error on tax return.
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In general, the higher your tax bracket, the greater the potential benefit of a mortgage. Once retired, your tax bracket is likely to be lower.

Because one size does not fit all, it is best to run the calculations to see the impact having a mortgage actually has on your tax return. It may not be saving you as much in taxes as you think - and the lower your mortgage balance and the lower the interest rate - the less the tax savings.

It may make sense to pay off your mortgage just after you retire, instead of before retirement. By clicking on the link above, you'll find more details on how to evaluate the tax impact of your mortgage both before and after retirement.

Should I Invest or Pay Off the Mortgage?

Investing can seem be a roll of the dice.
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To determine if you should invest or pay off your mortgage, you need to compare the after-tax return on your investments with the after-tax cost of your mortgage.

Many people naturally assume the #1 goal of pre-retirement is to have the home owned free and clear. Although there is nothing wrong with this goal, other retirement goals should not be overlooked, including taking advantage of tax deductions for contributions to IRAs or company retirement plans.

The example in the article at the link above walks you through how to do calculations to compare your options.

Should You Pay Off Your Mortgage Before You Retire?

This happy couple planned correctly and took advantage of tax maximizing strategies.
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This U.S. News & World Report article covers all the relevant factors to consider when deciding if you should pay off your mortgage; items such as taxes, interest rates and liquidity.

The article also walks through a great case study where this particular couple found middle ground by choosing to downsize.

Your situation is unique to you and getting all your ducks in a row is critical to making a wise decision.