Yahoo Finance I’m a Retirement Planner: Reasons To Pay Your Mortgage Off Before You Retire
As you close in on your retirement years, your focus is likely on lowering expenses to maximize what might be a limited or reduced income. One of the biggest expenses is often a mortgage payment.
To avoid having to fork out such a significant chunk of retirement income to a hefty mortgage payment after retirement, many retirees try to get ahead of this by paying off their mortgage early.
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GOBankingRates spoke to Tim Hewitt, CFP, senior vice president of Wealth Enhancement Group, who explains some reasons you should consider doing this before you retire.
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When You Can’t Deduct Your Mortgage Interest
After the 2017 Tax Cuts and Jobs Act, the government increased the standard deduction and made it difficult for most people to write off their mortgage interest, Hewitt explained.
“So, for some people, a tax benefit is no longer a tax benefit. That’s one reason that we’re seeing more people want to pay off their mortgage,” he said. However, you may need to check with an accountant to find out whether you can deduct yours or not.
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Home Costs Have Increased
Additionally, home costs have increased over the last five years or so, making these costs a bigger part of people’s fixed expenses, Hewitt pointed out. “So if you’re looking to pay off a home loan, it can decrease the amount of your fixed expenses and then your expenses become more discretionary, [to be spent] on just the fun things, [like] travel and dining out and leisure.”
Some people may therefore choose to pay larger amounts on their mortgage in the years when they’re producing more income and then pull back when their income is reduced in retirement, Hewitt said.
Assess Your Loan
Determining whether you need to pay off your mortgage before you retire also depends on the interest rate of your loan and when you bought the home, Hewitt explained.
“If [the home was] bought more recently with rates at 6% to 8%, then it becomes a great benefit if the cash in their account is only earning them 4% or 5% to then pay off this higher interest rate debt, especially if they’re not getting the tax benefit of writing off that mortgage interest,” he said.
For people who may have purchased a home more than a decade ago where they locked in a low interest rate, around 2% to 3%, they may not need to pay off a mortgage before retirement, Hewitt said, since their payments might be low and they might still get tax benefits from owning.
“So I think the interest rate and the client’s comfort level with debt are the two main drivers for that decision,” Hewitt said.
Factor Your Mortgage Into Your Planning
Alternatively, you can consider building your mortgage into your retirement plan, Hewitt said.
“If the cash flows are a little bit tight or [the mortgage is] a high percentage of their monthly spend, that’s another motivator for us as financial advisors to recommend paying that down tax-efficiently,” he explained.
To Protect the Health of a Spouse
You may also want to pay off your mortgage by the time you retire to protect your spouse financially or to give your children peace of mind.
“So if there’s a health event or if you have a family history that doesn’t support longevity, then that could be a reason to make things easier for your spouse, not leaving your spouse with a large liability that they might have to scramble to pay off,” Hewitt said.
That makes it easier for your beneficiaries to sell a property that’s free and clear instead of one that has debt attached to it, he said.
If You Have a Variable Interest Rate
Another great reason to pay off your mortgage before retirement is if you signed up for a variable interest rate loan, in which you signed the loan at a lower rate with the awareness that it would step up in the future.
“I have some clients who are working to pay their loan off within that term so they’re not doubling or tripling their interest rate,” Hewitt explained.
To Afford the Other Costs of Homeownership
Paying off a mortgage will also free up cash to pay for the other costs of homeownership, such as taxes, insurance, maintenance and repairs, Hewitt explained.
“And if your home has a lot of deferred maintenance or a lot of large upcoming costs, that could be a reason to decide if you want to stay in this home and commit to that home or purchase another home that has less of that lower cost of living,” he said.
You Can Sell Your Home for a Large Cash Infusion
If your home is paid off in retirement, you can tap that equity free and clear for any number of reasons, ranging from just adding more of a security blanket to your retirement to leaving a legacy to your heirs, according to Hewitt.
“If their financial plan is a little tight and they want a cash infusion to be able to spend more in those later years or have a little more money for healthcare costs, that could be another valid reason to make the switch,” he said.
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This article originally appeared on GOBankingRates.com: I’m a Retirement Planner: Reasons To Pay Your Mortgage Off Before You Retire
