Pros and cons of paying off mortgage before retirement

Advisors


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Seniors who retire a mortgage may enjoy reduced stress, increased cash flow and significant equity cushion.

“While some people may claim that they can make 8 [percent] to 10 percent in the stock market while the mortgage may cost them only 3 [percent] to 4 percent, tread carefully,” he said. “While long-term historical averages can be that high, as investors we earn our returns day by day, not in 50-year chunks.

“The market can stay irrational longer than you can stay solvent,” said Stark.

In some cases, it is more tax-efficient to pay off the mortgage, said Dana Anspach, CFP and CEO of Sensible Money.

She warns against using taxable withdrawals from individual retirement accounts and 401(k) plans to make mortgage payments. Using the example of a $1,500 monthly mortgage payment, she points out that an individual would need to withdraw more than $2,000 per month in order to cover both taxes and mortgage.

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“That additional withdrawal could bump you into a higher tax rate and could even cause more of your Social Security to be taxable,” Anspach added. “These additional taxes are likely to be far more than any potential tax deduction you would have received on the mortgage interest.”

Leon LaBrecque, JD, CFP, and managing partner and CEO of LJPR Financial Advisors, offered several financial and behavioral benefits to retiring a mortgage early:

  • Having the mortgage paid off lowers your required cash flow and changes your potential asset allocation, allowing you to be a little more aggressive.
  • Getting rid of an anti-asset — a liability — is like making an investment. For every dollar you pay on your principal, you’re making the interest rate back because you’re not paying it to someone else. For example, paying off, or down, a 4 percent mortgage makes you 4 percent with no management fee.
  • Paying off your mortgage is 100 percent safe. There is zero market risk.
  • Out of sight, out of mind. You aren’t tempted to spend that mortgage money on other things, while you are reducing that debt.



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