For many soon-to-be retirees, paying off their mortgage marks the first (or final) step toward financial independence. Without the burden of a housing payment (other than property taxes and homeowners' insurance) in retirement, many are able to supplement their lifestyles on their Social Security check, a pension, or retirement savings. But like other aspects of personal finance, the decision whether to pay off your mortgage before you retire is a highly individual one and can't always be decided on the basis of facts and figures alone. Read on for some of the factors you'll want to consider when deciding to pay off your mortgage early, before your retirement.
Your Other Investments
If you have one or more highly stable sources of retirement funds (like a pension or Social Security), you're less vulnerable to market fluctuations and economic recessions. Paying off your mortgage can provide you with even more stability, helping you remain calm even when times are troubled.
On the other hand, those whose retirement assets are almost entirely held in the stock market may benefit even more from paying off their mortgage. By freeing up these funds each month, you'll be less pressured to make withdrawals from your 401(k), IRA, or other retirement assets during a dip. If you opt not to pay off your mortgage early, you may still want to maintain enough funds in cash to pay off your principal in the event of another Great Recession.
Your Property Taxes and Insurance
For some homeowners, paying off a mortgage can be an anticlimactic event when property taxes and homeowners' insurance premiums total just as much (or more) as each month's principal and interest payment. It may not seem worthwhile to use cash to prepay a low-interest rate loan when you'll still be on the hook for a hefty property tax bill going forward.
But for those in low tax and low cost-of-living areas, paying off a mortgage can often eliminate the largest line item in one's budget, making far more of a difference when it comes to funding their retirement.
Your Future Housing Plans
If you've dreamed of retiring on a beach or downsizing to an RV to travel the country, having a paid-off house can make this process much simpler. Instead of adding contingency clauses to your real estate contracts to ensure you have a new home in place before you accept an offer on your current one, you'll be able to sell your home free and clear from any liens and pocket the proceeds.
On the other hand, if you're planning to stay in your home for the foreseeable future, sticking to your original payoff schedule may be the wiser choice.