Paying off the mortgage after 30 years used to be a rite of passage for Americans approaching retirement age but this once-common scenario is no longer the norm. Baby boomers, those born between 1946 and 1965, are carrying more mortgage debt than earlier generations and are less likely than earlier generations to own their homes at retirement age, according to research from Fannie Mae's Economic and Strategic Research Group.
Whether it makes financial sense for retirees or those nearing retirement to pay off their mortgages depends on factors such as income, mortgage size, savings, and the value of the mortgage interest deduction.
Key Takeaways
- Paying off a mortgage can be smart for retirees or those who are just about to retire if they're in a lower income tax bracket,
- It can also benefit those who have a high-interest mortgage or who don't benefit from the mortgage interest tax deduction.
- It's generally not a good idea to withdraw from a retirement account to pay off a mortgage. That could reduce your retirement income too much.
- There are other options to consider if you have a hefty mortgage, such as downsizing to a home that fits your retirement budget.
When to Continue Making Mortgage Payments
Making monthly mortgage payments makes sense for retirees who can do so comfortably without sacrificing their standard of living. It's often a good choice for retirees or those who are just about to retire and who are in a high income tax bracket, have a low-interest mortgage under 5%, and can benefit from the deduction on mortgage interest.
This is particularly true if paying off a mortgage would mean not having a savings cushion for unexpected costs or emergencies such as medical expenses.
Continuing to make monthly mortgage payments makes sense for retirees who can do it comfortably and benefit from the interest tax deduction.
It may make sense to do so if you're retiring within the next few years and have the cash to pay off your mortgage, particularly if your money is in a low-interest savings account. Again, this works best for those who have a well-funded retirement account and enough reserve funds for unexpected emergencies.
Paying off the mortgage ahead of retirement can be a real stress reducer. Your monthly expenses will be cut, leaving you less vulnerable to a sudden property tax increase, an emergency repair, or the impact of inflation. You'll save on the interest you would owe by keeping the mortgage.
Entering your retirement years without monthly mortgage payments means you won’t have to use your retirement funds to pay for them.
Avoid Tapping Retirement Funds
Generally, it's not a good idea to withdraw from a retirement plan such as an individual retirement account (IRA) or a 401(k) to pay off a mortgage. You'll incur both taxes and early-payment penalties if you withdraw before you reach age 59½.
The tax hit of taking a large distribution from a retirement plan could push you into a higher tax bracket for the year even if you wait until you're older than age 59½.
It's also not a good idea to pay off a mortgage at the expense of funding a retirement account. Those nearing retirement should be making maximum contributions to their retirement plans.
Research over the past several years has shown that the majority of people are not saving enough for retirement.The National Institute on Retirement Security revealed in a report that more than half (57%) of working-age people didn't have aretirement account.The report adds that the typical worker had a modest account balance of $40,000 even among workers who'd accumulated some savings in retirement accounts.
Strategies to Pay Off or Reduce Your Mortgage
You can use certain strategies to pay off your mortgage early or at least reduce your payments before retirement. Making payments every other week instead of once monthly means that you'll make 26 payments in a year instead of just 12. You might also just pay a little extra each time you make a monthly mortgage payment to whittle down your loan.
Another option is downsizing if you have a larger home. You might be able to buy a smaller home outright with the profit from the sale if you structure the sale correctly, leaving you mortgage-free.The pitfalls include overestimating the worth of your current home, underestimating the cost of a new home, ignoring the tax implications of the deal, and overlooking closing costs.
Should I Refinance My Mortgage to Lower the Monthly Payment?
This would have been an option during the years when mortgage rates were below 5%. Interest rates began to climb steadily in 2022 and had topped 7% by late in the year. Anyone who obtained a mortgage or refinanced one in the years of low interest rates is unlikely to get a better deal in the foreseeable future.
Are Many Retirees Still Paying Off Mortgages?
About 44 percent of retired Americans between the ages of 60 and 70 are still paying off their mortgages. Many of them expect to be paying it for the next eight years. Note that most of them bought their homes more than 20 years ago, and either financed or refinanced their mortgages during the low-interest years.
Is It Worth Keeping the Mortgage to Get the Mortgage Interest Tax Deduction?
Federal tax law changes implemented in 2018 nearly doubled the standard deduction and eliminated many itemized deductions. Since then, fewer Americans have found it worthwhile to itemize their taxes, even if they have mortgage interest to deduct.
The standard deduction for 2022 taxes is $12,900 for single filers and $25,900 for joint filers. If your interest payment (plus any miscellaneous deductions you might have) is less than that, you're better off taking the standard deduction anyway.
The Bottom Line
Paying off a mortgage and owning a home outright before you retire can providepeace of mind but it's not the best choice for everyone. It's best to consult a financial advisor if you're a retireeor a few years away from retirement and have them carefully examine your circ*mstances to help you make the right choice.
Correction–April 18, 2024: This article has been updated to reflect that making mortgage payments biweekly would result in 26 payments a year.
FAQs
Key Takeaways. Paying off a mortgage can be smart for retirees or those who are just about to retire if they're in a lower income tax bracket, It can also benefit those who have a high-interest mortgage or who don't benefit from the mortgage interest tax deduction.
Is it better to pay off a mortgage or save for retirement? ›
It's typically smarter to pay down your mortgage as much as possible at the very beginning of the loan to avoid ultimately paying more in interest. If you're in or near the later years of your mortgage, it may be more valuable to put your money into retirement accounts or other investments.
At what age should a mortgage be paid off? ›
There's no need to pay off your mortgage by a certain age, although one common rule of thumb says you should pay off your mortgage before you retire. The idea is that getting rid of one of your biggest monthly expenses means you need less income to cover your living expenses.
Does Dave Ramsey recommend paying off a mortgage? ›
Paying off your mortgage early will rev up your wealth building.” However, one of his more controversial pieces of advice revolves around not paying off your mortgage early, even if you can do so. This advice counters the traditional wisdom of becoming debt-free ASAP.
What percentage of retirees are mortgage free? ›
An unmortgaged home was once a retirement perk
Mark Iwry, nonresident senior fellow at the Brookings Institution. But that pattern is changing. In the Michigan study, researchers found that the share of retirement-age homeowners with mortgages rose from 38% to 51% in a generational span of about 25 years.
Are there disadvantages to paying off a mortgage? ›
A: If you put extra resources toward a home loan, you'll no longer have access to that cash flow and that's one of the disadvantages of paying off a mortgage. That means it's important to establish an emergency fund first — generally three to six months of living expenses — for unexpected financial needs.
What three things should be paid off before retirement? ›
And we'd certainly pay off our mortgages, credit cards, and car loans before we retire. But that's not always possible.
What percentage of Americans pay off their mortgage? ›
40% of Americans Pay Off Their House — Are They Doing Better Financially? For most Americans, a home mortgage is the biggest financial obligation they will ever have. A traditional mortgage spans 30 years and is often in the hundreds of thousands of dollars, so the interest charges can be enormous.
What is the best age to be mortgage free? ›
A good goal is to be debt-free by retirement age, either 65 or earlier if you want. If you have other goals, such as taking a sabbatical or starting a business, you should make sure that your debt isn't going to hold you back.
At what age should I be debt free? ›
Carrying the burden of debt is the way of life for many. According to Experian, as of the third quarter of 2023, the average American held $104,215 in debt. You're probably very familiar with the negative side effects of debt and how hard paying it down can be, but do you know that by age 45, you should be debt free?
Paying off your mortgage early can provide several benefits, including peace of mind and freed-up cash flow. However, paying off a mortgage early is not always the best idea, even if you have the money.
What are the tax implications of paying off your mortgage? ›
Make a note to alert your accountant come tax season: You'll no longer have mortgage interest to deduct on your tax return. Watch your credit. Keep tabs on your credit score; after your mortgage loan is removed from your credit history, your score may drop slightly.
How much do you need to retire if your house is paid off? ›
In simplest terms, take a $2,500 mortgage payment out of the picture and you've just reduced your annual expenses by $30,000. Now, factor that against the amount of money you'll need to manage retirement: between 55% to 80% of your current annual income, according to Fidelity.
Should I take money out of retirement to pay off my mortgage? ›
Paying off your mortgage may make sense if: You have substantial retirement savings, especially if the funds you'd be withdrawing are in a taxable account and are not earning much interest. You're downsizing.
Can an 80 year old get a 30 year mortgage? ›
No age is too old to buy or refinance a house, if you have the means. The Equal Credit Opportunity Act prohibits lenders from blocking or discouraging anyone from a mortgage based on age. If we're basing eligibility on age alone, a 36-year-old and a 66-year-old have the same chances of qualifying for a mortgage loan.
How many people over 70 still have a mortgage? ›
Mortgage debt remains uncommon among homeowners age 65-plus relative to their younger counterparts; in fact, the fraction of homeowners age 65-plus who had a mortgage in 2022 (34 percent) was less than half that of homeowners under age 65 (70 percent) 3.
Is it better to keep money in savings or pay off mortgage? ›
In principle, if you're offered a higher interest rate on a savings account than the rate you pay on your mortgage, it could mean it's best for you to save. However, if you're paying a higher interest rate on your mortgage than you could earn from a savings account, it might be best to pay off your mortgage first.
Should I prioritize saving for retirement or house? ›
To safeguard your financial health, prioritize paying off high-interest debts, adding to an emergency fund, and paying into a retirement account. Home equity can benefit you financially, but retirement savings may be critical to supplement Social Security payments and pay for essentials later in life.
How much do I need to retire if my house is paid off? ›
One rule of thumb is that you'll need 70% of your pre-retirement yearly salary to live comfortably. That might be enough if you've paid off your mortgage and are in excellent health when you kiss the office good-bye.
Does paying off a mortgage faster save money? ›
Paying off your mortgage early can help save thousands of dollars in interest. But before you start throwing a lot of money in that direction, you'll need to consider a few factors to determine whether it's a smart option.
