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Should You Pay Off Your Mortgage Before You Retire?

6-Minute Read
Published on May 3, 2022

Owning a home is important for many Americans. But while your home brings you joy, it may also be a source of stress. No one wants to imagine a mortgage haunting them for decades on end. So, as you save for your golden years, you may be wondering: should you pay off your mortgage before you retire? Well, the answer depends.

Paying off a mortgage early can come with several financial and personal benefits. But it’s not necessary for a financially secure future. Consider these points before you make your decision.

Should You Pay Off Your Mortgage Before Retirement?

The standard 20th-century advice for workers was clear: wait to retire until after the mortgage is gone. The reason for that came from the typical retiree income. Most people faced reduced monthly income in retirement and relied on a pension. Without a mortgage to repay, they could comfortably cover their living expenses with that lower amount.

But nowadays, financial situations vary across the board. So, while it’s ideal to pay your mortgage off early, it’s not necessary. You can still have a financially secure retirement while carrying on a mortgage. It just depends on your circumstances.

If you’re debating whether to pay off your mortgage early, consider your present and future finances. The answer will depend on your financial situation.

Why Is It Better To Retire After Paying Off Your Mortgage?

Generally, it’s better to pay your mortgage from income rather than savings. That way, you’re not cutting into your future financial well-being. Savings are necessary for the years you won’t be able to work, emergency costs and other unexpected expenses. So, you don’t want your mortgage eating into those funds, leaving you vulnerable.

But while paying off a mortgage early can free you from debt, it’s not necessary for every person.

According to research from LendingTree, almost 10 million homeowners aged 65 and older still pay a mortgage. That accounted for nearly 19% of homeowners in that age range across 50 metros. So, it’s very common for several Americans.

What’s Different About Paying Off Your Mortgage Before Retirement Now?

Most people continue to earn an income into their retirement. They rely on sources like their 401(k)s, Social Security and other investments. Put together, some retirees even manage to earn their same amount of income based on these various streams of money.  

Having that money means you won’t have to pay your mortgage from your savings. It also means that paying your mortgage off early might not jeopardize your nest egg. After all, you’ll still have income coming in.

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Should You Pay Off Your Mortgage Early?

You might be able to pay off your mortgage early. While it may require hard work, it can be incredibly rewarding. For example:

You’ll Be Debt Free

Without a mortgage, you’ll no longer have to answer to that monthly payment. That means greater freedom over your finances. You can spend your money on things you care about, like your grandchildren, or things like hobbies, financial opportunities and more. Being debt-free means having options for you and your loved ones.

You’ll Have Peace Of Mind

Debt can be an emotional weight on our shoulders. Paying off your mortgage means fewer things to worry about going into your golden years. Plus, it provides flexibility. Imagine you have a financial emergency while you’re in retirement. You won’t have to worry about juggling mortgage payments with hospital bills or other costs. You also don’t have to fear your home going into foreclosure and losing it.

Your Overall Retirement Plan Makes It Worthwhile

Your retirement plan is what will carry you through your golden years. So, the last thing you want to do is risk it or your finances. And paying off your mortgage might be a part of that plan.

Discuss your options with your financial advisor. They may recommend balancing low-earning investments with an early pay off of your mortgage. But if that doesn’t work for you, you can always ask for alternative strategies.

Should You Continue Paying Your Mortgage In Retirement?

You may not want to carry your mortgage into retirement with you. But there are some financial benefits to the situation. So, it might be worthwhile to hold on to your home loan even when you leave your 9-to-5.

You Might Be Able To Earn More Through Investments

Disciplined savers with low-interest mortgages might make out better by strategizing their savings. In fact, you may want to put your extra funds in a higher ROI (return on investment) investment.

By investing, you have the potential to make more money. Not only that, but market investments can be more liquid than a home. This means you can easily sell your investments and access your cash if needed.

You Might Be Better Off Paying Off Higher Interest Debt

You might want to prioritize which debt you tackle first. There are other forms of common debt that probably have much higher interest rates than your mortgage. For example, credit cards can come with incredibly high interest rates. Paying debt like that off first while still making an income will free up your retirement savings later. 

You Might Be Losing A Tax Deduction

If you’re still able to itemize your expenses, you can receive a mortgage interest tax deduction. This deduction is a tax incentive that allows you to count interest paid on a home loan against your taxable income. Thus, it shrinks the amount of taxes you owe. However, you lose out on that deduction if you pay off your mortgage early.

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What Are Best Practices For Paying Off Mortgage Vs. Saving For Retirement?

Planning for retirement requires strategy. Here are some ways you can make the most of your mortgage and still save money:

Refinance While Rates Are Still Low

Mortgage interest rates drastically dropped during the COVID-19 pandemic. If you’re interested in refinancing, it’s better to do it sooner rather than later. That way, you can take advantage of recent rates, which are still low, before they rise more than they already have.

Generally, refinancing is a good idea if it helps you build equity, save money, and pay your mortgage off faster.

Choose A Flexible Mortgage 

Homebuyers typically choose a 30-year fixed-rate mortgage when they borrow. This is because it usually yields predictable and lower monthly payments. But if you’d like to live debt-free as soon as possible, it might be worth switching to a 15-year fixed-rate mortgage.

With Rocket Mortgage®, you have a pathway to that shorter term when you choose YOURgage®. Using this loan option, you can take a conventional fixed-rate mortgage and make it your own. You decide the loan term of 8 – 30 years and how much you want to pay monthly.

Having a shorter loan term may mean slightly higher monthly payments. However, you face less interest over the loan’s life.

Max Out Retirement Savings Plans First

Everyone works toward retirement at their own pace. But if you plan to keep working for several more years, it may be wise to focus on building your nest egg. That means maxing out your 401(k) and individual retirement account (IRA) before working overtime on your mortgage.

Mortgage Alternatives For Extra Cash

After maxing out your retirement plan, you may have funds left over. Here are some ways you can put that cash to good use on your mortgage:

Mortgage Recast

With a mortgage recast, borrowers can put down one lump-sum payment on their loan’s principal balance. This allows them to reduce their monthly mortgage payments. It also changes their repayment schedule. However, the loan’s terms and interest rate remain the same.

There are various rules for a mortgage recast, and each lender will have their own version of these rules. Most lenders will require a payment worth at least $5,000 for a mortgage recast, though.

Extra Payments

You put extra payments toward your mortgage to help pay off your loan early. Some homeowners choose to do this on a regular schedule and with a consistent amount of cash. Others may do it as they can with whatever extra funds they have. The best option for you will just depend on your financial situation.

However, if you want to try this, make sure you notify your lender. Let them know you want the funds to go directly toward your principal balance – not interest.

Rate-And-Term Refinance

A rate-and-term refinance is one way for borrowers to obtain better loan terms. Essentially, you can swap your current loan for a new, different mortgage contract. This works best if you struggle to pay your existing loan or interest rates are lower than when you first borrowed.

All you must do is take on the new loan, use it to pay the rest of your first loan, and then begin repaying the new mortgage after refinancing. This opens the door to a shorter loan term or lower monthly payments.

The Bottom Line: Paying Off Your Mortgage Isn’t A Prerequisite Of Retirement

Planning for retirement is complicated. But while there are many things to consider as you age, your mortgage is one of the most crucial. You must consider is where your loan repayments will fit into your overall financial plan.

Remember: you have options. You can focus on maxing out your retirement savings or hunker down on your monthly mortgage. It’s up to you. Speaking to a financial advisor may help direct your path, though.

In that same vein, you may want to change up your mortgage. That’s where refinancing comes in. It offers homeowners an opportunity for lower monthly payments and the potential to become debt-free sooner. If you’re interested, apply now and lock in while rates are still low.

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Headshot Ashley Kilroy

Ashley Kilroy

Ashley Kilroy is an experienced financial writer. In addition to being a contributing writer at Rocket Homes, she writes for solo entrepreneurs as well as for Fortune 500 companies. Ashley is a finance graduate of the University of Cincinnati. When she isn’t helping people understand their finances, you may find Ashley cage diving with great whites or on safari in South Africa.