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You’re looking forward to retirement, but there’s one problem — you still have a mortgage to pay. And you’ve probably wondered if you should pay it off before you retire.
For many, it can be a smart choice, creating a situation where you have a place to live without worrying about making mortgage payments. But there are drawbacks to this strategy, too.
Here’s how to decide if paying off your mortgage before retirement makes sense for you:
- Most people should pay off their mortgage before retiring
- Pros and cons of paying off your mortgage before retirement
- 3 ways to pay off your mortgage early
- What to do if you can’t pay off your mortgage before retirement
Most people should pay off their mortgage before retiring
An analysis from the Center for Retirement Research at Boston College looked at different scenarios homeowners might face as they approach retirement, such as paying off their mortgage before retiring or maintaining their mortgage and investing in other assets.
While different results can come with different outcomes, the analysis found that most retirees would benefit from being mortgage-free by the time they retire. This has a number of benefits, such as:
- Providing peace of mind
- Offering you access to a large asset
- Increasing your cash flow
- Saving you on interest
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Pros and cons of paying off your mortgage before retirement
While most people are better off not carrying a mortgage into retirement, there are cases in which doing so might make financial sense. It all depends on the retirees’ individual circumstances.
|One less monthly payment obligation||Less cash to invest|
|More equity to pay for big expenses later, such as long-term care||Extra mortgage payments may not provide the same tax efficiency — you might be better off contributing to a tax-advantaged retirement account instead|
|Increased monthly cash flow and less of a need to draw from your retirement savings||Reduced liquidity compared to an investment account, since it can be harder to tap into your home’s equity|
- One less monthly payment obligation: When you’re retired without a regular source of job-related income, you might feel stressed due to your obligations. By paying off your mortgage early, you’ll have one less thing to worry about, improving your mental health while ensuring you have a place to live.
- Equity to pay for big expenses later: Paying off your mortgage grants you all the equity in your home. Later, you can tap this pool of equity to cover large costs, like long-term care. You can also sell your current home and use the equity for downsizing to a smaller home.
- Increased monthly cash flow: Without a mortgage payment, your monthly cash flow will be higher. You’ll have more money freed up to take care of daily expenses. Or, you can simply cut back on costs since you aren’t stuck paying the mortgage.
- Less cash to invest: If you put more money towards your mortgage, you’ll have less cash to invest. You might be able to earn a higher rate of return by investing your money instead.
- Lower potential tax efficiency: Depending on your situation and whether you itemize, you might not see the same tax efficiency by making extra mortgage payments. You might get more in return by putting the money in a tax-advantaged retirement account, like a 401(k) or traditional IRA.
- Reduced liquidity: Even though you have this large asset, it can take weeks to get approved for a home equity loan or line of credit. If you keep the mortgage and invest the money you would have used, you’ll have access to more liquid investment accounts.
Keep reading: Should You Rent or Buy in Retirement? Making the Right Choice
3 ways to pay off your mortgage early
If you’ve decided that paying off your mortgage before retirement is the right move, here are some strategies you should consider.
1. Refinance to a shorter loan term
One way to get rid of your mortgage faster is to refinance to a shorter loan term, such as a 10-year or 15-year term. This can help you lower your interest rate and put you on the fast track to paying off your mortgage.
However, it’s important to note that a shorter loan term usually means higher payments. Make sure your monthly budget can handle the higher payments before you refinance to a shorter term.
Credible makes comparing multiple lenders easy. For your next mortgage refinance, start by checking prequalified mortgage rates on Credible. Checking rates with us is free, secure, and has no effect on your credit score.
Check refinance rates:
- 10-year fixed refinance rates
- 15-year fixed refinance rates
- 20-year fixed refinance rates
- 30-year fixed refinance rates
2. Switch to biweekly payments
When you switch to biweekly mortgage payments, you split your payment in half and pay twice each month. Because there are 52 weeks in a year, you end up making 26 payments — the equivalent of 13 monthly mortgage payments.
With this strategy, you’ll knock a few years off your mortgage and reduce the amount of interest you pay. This can also be helpful if you want to maintain your current budget but pay off the loan a little earlier.
3. Recast your mortgage
With a mortgage recast, you make a large lump sum payment toward your principal. After making the payment, your lender will reamortize your loan based on how much you put down.
This strategy can be a way to cut your monthly required payments and potentially save money on interest. Once you’ve recast your mortgage, you can make bigger payments and work to pay off the mortgage even faster.
What to do if you can’t pay off your mortgage before retirement
Retiring without a mortgage isn’t always possible, but there are still strategies you can utilize to lessen the financial burden imposed by mortgage payments.
Get a 30-year refinance
With a 30-year mortgage refinance, you can reduce the monthly payment, making it more manageable on a fixed-income during retirement. You’ll likely pay more in interest — and you’ll need to factor in closing costs, too.
Credible makes refinancing easy. You can see your rates from our partner lenders in the table below. We also provide transparency into lender fees that other comparison sites typically don’t.
Consider a reverse mortgage
Another way to reduce the burden is a reverse mortgage. You receive regular payments or a lump sum and then use the money for various expenses.
Repayment on a reverse mortgage is only required after you no longer occupy the home. If you get an FHA-approved reverse mortgage, the lender can only recoup what your home sells for.