3 Key Factors to Consider Before Paying Your Mortgage Off in Retirement

Connor plans to retire soon and wonders if he should pay off his mortgage of $300,000 or invest those funds, especially since he has a low interest rate. James gives a detailed response and reveals why there is no one-size-fits-all answer. When it comes to having a mortgage in retirement, math and spreadsheets can help with part of the question, but emotions and personal values should be considered too.

Questions answered:
Should you pay off your mortgage as you head into retirement, especially if you secured a low interest rate mortgage in recent years?

How should you weigh the financial benefits of investing available funds versus the emotional peace of mind of being debt-free in retirement?

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⏱Timestamps:⏱
0:00 - Connor’s question
1:36 - An example scenario
4:51 - Interest rates
6:22 - Tax considerations
9:13 - Tax-adjusted mortgage interest rate
12:13 - Sequence of returns
15:27 - Peace of mind
17:07 - Conclusion

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Worried about retirement?

[donaldlewis]

We debated this, but for us the peace of mind of having our mortgage paid off when we retired was worth its weight in gold for us. Being debt free at retirement was a dream of mine and will make it a reality next year :)

[stevemlejnek]

Very few people itemize thier deductions. For those taking the standard deduction, there is no tax deduction benefit of having mortgage interest.

[MResearch]

Thank you for emphasizing that just because your mortgage interest enables itemizing, it doesn’t make the net tax benefit real… you must consider how much your mortgage interest drives you OVER the standard deduction!

So many channels miss this element of the analysis.

[williamrogers]

One of the issues not discussed in the video is the reduction of liquidity in one's net worth. Paying down a mortgage only saves interest since you still have to pay insurance, property taxes, and HOA dues (if applicable). Paying off the principal converts liquid interest-earning cash to an illiquid asset (i.e., real estate), subject to market losses (i.e., the housing crisis 2008) and high friction costs if you want to get that liquidity back. We have a 2.625% mortgage which includes $385 in interest payments and we take the standard deduction for taxpayers over age 65. No way I will pay $177, 000 to save $385 per month (and decrease each month the mortgage is paid) and convert an interest-earning cash asset to an illiquid asset that can potentially lose money. While some may want to sleep well at night with a paid-off mortgage, this is sometimes called mental math. Unfortunately, mental math is not math.

A potential issue would be if you paid off the mortgage on your house, which was damaged by an event not covered by typical homeowners insurance (e.g., flood, earthquake, sinkhole, etc.)

[Caldwell-cn]

I am in my early 60s and retired at 53. Lots of people gave me pushback because they had difficulty grasping the concept of not working if you don’t have to. I looked at my life as stages. I earned everything I have now through a lot of hard work, but I owe it to myself to “stop and smell the roses” in my final stage of life. In my case I left the country after I retired and live in Latin America. It allowed me to get away from all the negative things happening in America while appreciating my new environment. I have yet to meet anyone who regrets retirement

[torchy]

Can’t see paying off my 30 year, 2.5% fixed rate mortgage

[robingow]

We paid off our mortgage years ago! Best decision ever!

[trseven]

Thanks for this discussion, as I am in a similar situation as Connor. The point made about how much above the mortgage interest is - compared to the itemized deduction threshold - is a consideration I hadn't explored. But one other aspect to paying off a $300k balance is also a practical one. Maintining a home will periocially require large rplacement costs (central AC, roof, etc). While I will be able to invest the mortgage payment if I paid it off too early, I don't want to tie up too much of my funds in just "feeling good" about not having a mortgage, then having a large unexpected expense. I plan to keep my mortgage until it gets down to a more manageble amount around $150k, keeping the payoff funds in interest bearing investments.

[davenielsen]

Great video James - how about using the benefit of inflation as well if paying off a debt over 20-30 years. Over time that mortgage balance will be "lower" as you pay off the mortgage with inflated dollars.

[zone]

Excellent insight, so many variables that people need to understand.

[vinnyg]

We made the decision to refi in 2020 as the rate was low, we have a 2 7/8% rate. We did it and saved about $250 per month in payments. Our P&I amount is slightly less than $500 per momth, for me it doesn’t make sense to pay it off and as was said, its part of our expenses. Our property taxes are a lot more monthly than the P &I!

I do think over the long run the money we didn’t use to pay off the mortgage will outpace the amount we will pay in the interest for the mortgage due to such a low rate we were able to get. If it was at 5% or more then it would be a different story.

[ericgold]

Fantastic video.

The key decision points were reviewed very carefully. A couple not mentioned:

1. The home acts to diversify the portfolio.
2. The paid-off home can be a source of liquid equity

It worked this way for me. When we bought our home the rate was 7.25%. We paid that off as quick as we could manage, but kept a home equity line of credit (HELOC). 10 years later the HELOC rate was 1%, and I wanted to keep my AGI low to collect the maximum ACA PTC. and to maximize my tIRA contributions. To supplement my AGI, I borrowed money at 1%. When interest rates went up and I was no longer running after the PTC, I paid off the HELOC

I don't mention this story as a strategy to copy, but to say that liquidity and diversification have significant value that are part of the decision whether to pay off a mortgage.

[dianacagle]

Please show the numbers you’re discussing on the screen so we can follow along. Thanks for the great info!

[hejiranyc]

This is basically me. I am targeting retirement in two years at age 57 and I have a $375K 15-year fixed mortgage @ 2.49% that I am paying down biweekly along with an extra $1000 principle payment/month. I'm currently in the 35% tax bracket along with maxing out SALT deductions, so the itemized deductions are a godsend. Plus, during the early years of retirement, these itemized tax deductions will allow me to do more Roth conversions, which is another benefit of keeping a mortgage in retirement.

[markb]

Thanks James for another very informative video!

[johnbrennick]

To summarize one point, if we're not itemizing deductions (i.e. taking the standard deduction - which, by the way, is a little higher over the age of 65), mortgage interest is not deductible. Even if we are itemizing, not all of the mortgage interest may be deductible.

[agentjacob]

In August 2022, I paid 615k with a 4.375 interest rate for my second property in San Diego. The property is currently worth $895k. I've already increased my ownership by over 30% in less than two years. There's no need for me to sell because I'm making over 90k in rental income from my two ADU studios, which pays my mortgage each month. In addition, my rate is ridiculously low, which I view as a benefit.

[Pjeski]

Yea I get more interest from the cds I have than what I pay on my mortgage, but I really want to pay it off.

[bjbhehir]

Nice video but I wrote a check at closing so I never had a mortgage to begin with! I retired 12 years ago at 50 and I live off of 2 rentals that are also both paid off and a VRBO condo on Maui that we live in about 6 months each year.

[MResearch]

What about:

1) Spreadsheet/MBA geeks (me) can get lost in the sheet leaves but miss the forest. If the sheet shows a gain of $5, 000 over 15/30 years of one decision or the other on a $350K mortgage, then that’s not really a material difference. Then perhaps the soft factors should drive the decision.

2) What about when you are on the maturity of the mortgage amortization curve? If you’re in the last third of the mortgage, every payment is heavily biased toward paying down the balance. That is, the composition of the payment is more principal than interest, whereas in the early part of the mortgage amortization, you’re paying all interest.