Should You Pay Off Your Mortgage before Retirement?
A recent study found that 41% of homeowners
between the ages of 60 and 69 still have a mortgage on their home.
Of those, 51% had sufficient assets to repay their mortgage (Source:
Center for Retirement Research, July 2009). The study found that
most households would be better off paying their mortgage off,
since the cost of the mortgage is higher than their investment
earnings. But is that good advice for your situation?
Before making this decision, be sure to
consider these factors:
- Compare your mortgage
interest rate to the rate you are earning on your investments. If you retain your mortgage because you believe
you will earn more on your investment assets, make sure that
is really happening. When paying off a mortgage, you are effectively
earning a pretax return equal to your mortgage interest rate,
which is a guaranteed return with no risk. Very few investment
alternatives have a guaranteed return with no risk.
- Consider the tax benefits
of the mortgage interest. Interest
paid on mortgages with balances of up to $1,000,000 and on home-equity
loans up to $100,000 is deductible on your federal tax return,
provided you itemize deductions. You only benefit if your total
itemized deductions exceed the standard deduction amount, which
in 2009 is $11,400 for married couples filing jointly and $5,700
for single taxpayers. According to the IRS, approximately two
out of three taxpayers use the standard deductions. Even if you
do itemize deductions, you are paying most of the interest cost
yourself anyway. For instance, if you're in the 25% tax bracket,
you save 25 cents in taxes for every dollar of interest, but
you're still paying the remaining 75 cents.
- Pay off consumer debt
first. Consumer debt typically carries higher interest
rates than mortgage rates, and interest payments are not typically
tax deductible, unless it's a home-equity loan. Thus, you should
probably pay off your consumer debt in full before paying down
your mortgage.
- Consider which funds
you would use to pay off the mortgage. If you are planning
to use tax-deferred monies, such as those in a traditional IRA
or 401(k) plan, to pay off your mortgage, those withdrawals could
be subject to income taxes, which will impact your decision to
pay off the mortgage. Financially, it is typically better to
use taxable accounts to pay off your mortgage.
- Retain some savings. You
don't want to use so much of your investment assets to pay off
your mortgage that you have difficulty paying for unexpected
expenditures.
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