For many years, it was the American dream to own a home. In later years it was the American dream to own the home debt free. Burning the mortgage papers was a celebratory passage.
However for those approaching retirement paying off a mortgage has its’ positive and negatives. Many factors both financial and emotional should be taken into consideration when deciding if or when a mortgage should be paid off in full?
Financial And Emotional Considerations
Debt Free Retirement
Is it a primary goal to have reduced living expenses in your retirement? Of course that would be the ideal situation. Paying off a mortgage will greatly increase your income and add flexibility to your investment plan. Whether the additional monies be invested or used for discretionary purchases, lower expensed equals less income needed for retirement.
Do you need deductions if you itemize your taxes? Mortgage interest is deductible if you itemize your taxes however, the longer you’ve paid into a mortgage, the more each payment consists of principal versus interest. Weigh the pros and cons to your overall financial plan.
Will or does your retirement plan require liquidity? Obviously mortgages are not liquid and money allocated to a mortgage is not liquid. Long term planning and forecasting can help determine how much of your retirement income needs to be liquid.
Are you paying Private Mortgage Insurance (PMI)? PMI is not always deductible; a deduction is dependent on how much a married couple earns. Money spent on PMI may earn a higher return invested elsewhere. PMI averages .5% of your mortgage which is money which makes money only for the lender.
Peace Of Mind
- How important is it to your piece of mind to be free of a mortgage?
- Is this a long term goal?
- Is it a realistic goal?
- Is it important to you to leave your home mortgage free to your heirs?
- How important is it to you after realistically considering the financial health of your heirs?
- If the house is left to a child or children, are they in a position to assume the mortgage?
- Is it your intent an heir or heirs keep the family home or liquidate the home?
This is a highly personal decision unique to each couple or home owner.
While a controversial financial tool for many, paying off a mortgage allows flexibility if needed after the age of 62 to consider a reverse mortgage. Specific restrictions apply to qualify for a reverse mortgage as well as estate planning issues. Nonetheless, the option will exist if a mortgage is paid off.
Do you use a financial planner? Should you use a financial planner? What is the advice of the planner in relation to your retirement income plan. Does your financial planner realistically consider all factors when providing advice and consultation? If you are using a financial planner or advisor it is important they can devise a plan which transitions your finances into retirement consistent with your goals and tolerance of risk.
Many diverse factors should be considered when paying off a mortgage. As with so many financial decisions the decision must weigh all the factors to come to a satisfactory decision for all parties. As always, seeking the advice of legal and financial professionals can help clarify the issues unique to each retirement or estate plan.