I’m nearing retirement and still have a mortgage. Should I consider paying off the mortgage with money from my investments?
“This is a difficult question to answer without being able to see your entire financial plan and retirement assets,” said FPA member Alan Landay, CFP®, CMFC. “But here are some things to keep in mind.
- Depending where you are in your mortgage payment schedule, you should be able to currently deduct mortgage interest. Having this deduction can lower your tax obligations depending on how much retirement income you have (Social Security, dividends, interest, wages, etc.). If you are near the end of the mortgage payment schedule, your interest deduction may be so small as to have very little impact on tax savings. You would need to sit down with a CPA or tax preparer to compare the taxes with and without the mortgage.
- Once you pay off the house, your investment dollars are now in the house. If you need money in an emergency, the only way to get the dollars back out of the house is to apply for a home equity line of credit to be able to access to money. This is, in fact, borrowing your own money back and now paying interest to do so.
- Home values have been dropping. How are the values where you live? It is not prudent to use investment dollars if the value of homes in your area are still dropping. It may take too long to recover those dollars if home values continue to drop.
- If you feel more comfortable not having a mortgage payment, does the reduction in investment dollars impact your retirement income now or in the future? You would need to take a look at what happens to your investment portfolio if those dollars are transferred to pay off the house.
- Do you plan to use a reverse mortgage in the future? If the house is paid off, you would have the ability to pull money out of your home tax-free to supplement retirement. This action is predicated on whether you plan to leave the house to children or other family members.
- Do you owe more on the house than the house is currently worth? Paying the mortgage early may cause those dollars to be lost unless housing values state to increase.
"But in the end, the right answer boils down to which reasons are the most important to you."