5 Benefits of Paying Off a Mortgage Before Retirement

By Tali Wee of Zillow


Homeowners are frequently curious whether they should save for retirement or pay off their mortgages. The best answer is to both save and pay off debt, but unfortunately one answer doesn't cover all cases. Review these five advantages to paying off a mortgage before entering into retirement.

1. Reduce Retirement Expenses

Most obviously, homeowners preparing for retirement want to minimize their expenses. Monthly mortgage payments typically account for 25 percent of the owner’s pre-retirement income, which is a lofty expense during retirement. Without the burden of mortgage costs, homeowners tend to feel more prepared to retire.

2. Save Costs of Interest

Paying off a mortgage before its 15- or 30-year term saves the homeowner interest costs. Homeowners with high interest rates who are close to paying off their mortgages may not benefit from refinancing because of expensive fees. However, aggressively paying off their mortgages would save these owners interest costs, which could then be applied toward retirement savings. Homeowners with variable rates on their mortgages also could benefit from paying off their loans early by saving on potential hikes in interest rates.

 

3. Tax Deductible Interest Payments

When homeowners are approaching retirement, they should save money as well as pay off debts. Many homeowners think 401k contributions are more profitable than paying off their mortgages, which may be true if employers match contributions. However, tax deductions may apply for interest payments on mortgages, which also save owners money. Homeowners should balance their current incomes to contribute to their 401ks while paying down their loans.

4. Highest Profit When Downsizing

Often times older homeowners choose to downsize their living quarters because large homes become more difficult to navigate or clean. Downsizing near retirement is common because sellers profit from their sale, applying a portion of the funds toward a smaller property and the remainder to retirement savings. The more equity the owner has in the home, the more profit he or she will receive upon the sale of the home. In other words, if the owner stills owes several thousand dollars on a property, he or she must pay the lender before pocketing the profit; if the home is paid off, the owner has more funds for new residency and retirement.

5. Spend less by paying off the mortgage

Often we mistake wants for needs and misspend our income. Savers who make extra payments to pay off their mortgages earlier increase their potential for a comfortable retirement because they simply spent less during their working years.

Although the general rule is home buyers can afford mortgages worth 25 percent if their incomes, it assumes their incomes don’t decline throughout the 30-year terms of their loans. If home buyers are more aware of their timelines for retirement, they’ll be more informed about the best type of loan for them upon purchase. Just as saving for retirement is a goal all working-aged individuals should strive for, getting out of debt to reduce expenses during retirement is equally important.

Tip of the Day

  • Written by Katie Bryan | December 16, 2013

    Check out the guide from @CFPB that helps you to know which questions to ask when shopping for a financial advisor http://ow.ly/rrjYO 

Saver Stories View all »

Building Wealth by Setting Goals

Written by Super User | April 24, 2013

My name is Allison Mecadon and I’m a Youth Coordinator with the Virginia National Guard Youth Program. My husband, Tom, is an M-Day Army National Guard Member (an M-Day member is one who performs weekend drill, but is not on full-time duty).

Read more...

Making Savings a Part of Marriage

Written by Super User | November 26, 2010

Capt. Rob Eckhardt is the first to admit that he hasn’t always been responsible with money. But less than 10 years after a rocky start to saving, Eckhardt reports that he and his wife are free from credit card debt, have a down payment on a home, and are saving regularly for retirement. And, as the Military Saves representative for his Air Force squadron, he’s helping others make similar progress.

Read more...

Money on the Side

Written by Super User | November 26, 2010

Camp Arifjan, Kuwait -- A colonel in the 1st Theater Sustainment Command has money on his mind.

Army Col. George Fields, the Chief of Intelligence, or G2, has been teaching a free "Managing Your Money" class here in his spare time. More than 400 students have attended his six week-long class to learn more about increasing their own finances.

"All I did was sit down and listen to a guy one day who showed me what he was doing" said the colonel as he explained how he became interested in what he calls, "becoming financially free."

Read more...