If you are like most people, you dream of being debt free when you retire. Being debt free means being without a mortgage too. But is it always right to own your home before you retire?
It really depends on your situation. Yes, many people do benefit from being mortgage free before they retire. There are some people, though, that don’t benefit from paying their mortgage off early.
Below we give you some questions to ponder before you decide to pay your mortgage off early.
Do You Have Liquid Assets Available?
In other words, are you going to run your finances dry by paying off your mortgage early? If so, it may not be worth it. Sure, you can say that you own your home free and clear, but if you can’t afford the daily cost of living, it won’t make sense to do so.
If you have a mortgage payment while you are retired, but you can afford it, leave it that way. This way you can have more disposable income handy as you need it. There’s no reason to make yourself suffer financially just to have all of your money stuck in a home that you can’t liquidate upon demand.
Do You Have an Emergency Fund?
In addition to your money for the daily cost of living, you also need money for an emergency fund. What if something catastrophic happens? Will you have the cash to cover it? If your money will be tied up in your home, it doesn’t make sense to pay your mortgage off early.
An emergency fund should have between 6 and 12 months of your monthly income in it. The emergency fund should also be very liquid, such as a savings or checking account. At the very least, you can have a home equity line of credit available. A HELOC is a 2nd mortgage on your home that you don’t make payments on until you withdraw the funds. If you use it as an emergency fund, you may never have to touch the funds.
If you don’t have an actual emergency fund or a HELOC though, you shouldn’t consider paying your mortgage off early.
Do You Have Other Unpaid Debts?
If you have other debts lingering, but it bugs you to have a mortgage, you can pay your mortgage off before retirement. This will free up more cash so that you can also get yourself out of debt from the other lingering debts.
If the other debts are damaging your credit score or your utilization rate, though, you may want to consider using the funds you’d pay off your mortgage with to pay off your other debts. You have benefits of keeping the mortgage, including tax benefits. Your credit card debt or installment debt doesn’t provide any benefits, so paying it off first makes more sense.
Do You Feel Like Your Mortgage is a Burden?
Some people just don’t like having debt hanging over their head. Even if they have a specific date the loan will end, it still bugs them to have it on their books. If that describes you and you have the funds, pay your mortgage off before retirement. Even though you’ll lose the tax benefits of having a mortgage, the peace of mind could be worth its weight in gold.
Do You Need the Tax Deduction?
Many people will still be able to write off their mortgage interest even with the new tax laws. If you are one of the lucky people that will be able to itemize your tax deductions, then having mortgage interest can be beneficial.
Oftentimes the two largest deductions homeowners have on their taxes are the real estate taxes and mortgage interest. If you pay your mortgage off before you retire, you lose that mortgage interest write-off, which could increase your tax liability. In other words, it could cost you money to pay your mortgage off too soon.
Should you pay your mortgage off before retirement? It really depends on your situation. Some people absolutely benefit, especially if the mortgage burdens them. Other people may be in better shape if they keep it though. Answer the above questions honestly, so that you can see where you stand.