For many ‘The American Dream’ includes the idea of paying off your mortgage and ultimately enjoying retirement without the burden of a housing payment. While this can be an important component of a retirement strategy, there are many things to consider before committing to making accelerated principal payments on or paying off your mortgage early.
It used to be that home buyers stayed in their homes longer and operated off the assumption that they would ultimately retire in that same home. These days a majority of home buyers are staying in their home less than 10 years which has the potential to change the conversation.
While it is true that paying additional amounts towards principal with each mortgage payment saves interest and accelerates payoff, the benefit is ultimately on the back end of the loan. From a cash flow perspective, this strategy means less money in savings and more equity trapped in the home.
For this reason, it’s worthwhile to look at the value of saving that money, investing and compounding while otherwise managing cash flow by making only the required mortgage payment. In theory, with a smart investment strategy, someone could find themselves with more in their investment accounts and the ability to simply pay off the mortgage in a lump sum.
Along the way there also would be additional benefit in the form of tax deductions. While the tax laws do change periodically, as happened with the Trump tax reform in 2018, generally mortgage interest remains tax deductible. It is common that individuals that pay off their home don’t anticipate the loss of the interest deduction and therefore have some additional tax liability they could have avoided.
The primary reason to pay off the mortgage before retirement is to be ready for what will ultimately be a fixed income and knowing that having a strict budget to keep up with living expenses and even more to pay for medical care is critical.
Some borrowers worry they’ll lose their home because of an inability to keep up with mortgage payments. Clearly this is a terrible outcome after all the effort made to purchase and pay timely along the way.
All these concerns remain valid but as is the case in most things, there is no one size fits all answer. In general borrowers that have significant savings, retirement accounts and guaranteed retirement income streams should look more carefully at the idea of holding the mortgage and retaining the tax deductions.
Other borrowers that expect to have little savings and minimal fixed income at retirement likely will have more benefit to ensure the mortgage is paid off at that time. Nevertheless, each situation is unique requiring analysis to decide what’s best.
At NGG Mortgage we are expects in long term mortgage planning and we encourage you to let our team help you analyze the whole picture and make the best plan to suit your needs.