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Should Retirees Pay Off Their Mortgages?

Should Retirees Pay Off Their Mortgages?

February 08, 2024

Paying off mortgages used to be a big milestone for Americans nearing retirement, but nowadays, more baby boomers carry mortgage debt into their retirement years, which differs from earlier generations.

Fannie Mae's research notes that factors like income, mortgage size, savings, and the value of mortgage interest deductions play a role in deciding whether paying off a mortgage is financially wise for retirees or those close to retiring.

Retiring with a mortgage can make sense depending on various factors.

For instance, it might be a smart move for those in lower-income brackets, with high-interest mortgages, or without significant benefits from mortgage interest tax deductions. However, withdrawing from a retirement account to clear a mortgage isn't generally advisable since it can shrink your retirement income.

Other alternatives like downsizing to a more budget-friendly home could be considered, especially for those burdened with a substantial mortgage.

For retirees comfortably managing monthly mortgage payments without compromising their lifestyle, continuing those payments might be a wise choice.

This is particularly true for those in higher-income brackets, with low-interest mortgages, and benefiting from tax deductions on mortgage interest. It ensures a financial cushion for unexpected expenses like medical bills and safeguards against sudden increases in property taxes or emergencies.

Paying off a mortgage before retirement can ease stress by reducing monthly expenses and avoiding interest payments. However, using retirement funds for this purpose or neglecting retirement contributions isn't recommended. Many people aren't saving adequately for retirement, as highlighted by research indicating a lack of retirement accounts or modest savings balances.

Strategies exist to pay off or reduce mortgages early, such as making biweekly payments or downsizing to a more affordable property.

Yet, while owning a home outright pre-retirement provides peace of mind, it might not suit everyone. Seeking advice from a financial advisor who can assess individual circumstances is crucial for making the right decision.

Refinancing for lower monthly payments was viable during low-interest rate years but might not be as beneficial with rates climbing above 7%.

Surprisingly, about 44% of retirees aged 60 to 70 still have mortgage payments, many of whom foresee continuing for several more years, mostly due to mortgages secured during low-rate periods.

The once-attractive mortgage interest deduction lost its appeal after tax law changes in 2018, which significantly raised standard deductions, making itemization less beneficial for many Americans. If your interest payments and other deductions are below the standard deduction threshold, it's often more advantageous to take the standard deduction instead.