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Should you pay off your mortgage in retirement?

Years ago, by the time most people reached retirement, their homes were paid off. If that’s not the case for you, you’re not alone. Today, the oldest baby boomers (born between 1946 and 1951) are less likely to have paid off their homes than previous generations.1 Another study revealed that 44% of 60- to 70-year-old homeowners bring their mortgage into retirement, and 32% expect it will take them more than eight years to pay it off.2 Your mortgage is a factor in your retirement income plan and can affect your quality of life. This makes the question about whether to pay off your mortgage in retirement an important one for many retirees.

When paying off your mortgage may make sense

There may be good reasons to pay off your mortgage. It can save you thousands of dollars in interest, depending on the current size of your debt, and give you peace of mind that no matter what happens in the future, you own your home outright. 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. If you’re planning to sell your home for a smaller one, you can apply the equity to your new home, resulting in a modest mortgage or perhaps no mortgage.

When paying off your mortgage may not make sense

One argument for not paying off your mortgage is that you may be able to do more with that same money by investing it, assuming your expected returns are higher than what you’re paying in interest on the loan. For example, if you get a 6% return on an investment and your mortgage is 5%, you’re 1% ahead on your money. However, this strategy only works if you actually invest the money and if the investment produces the returns you’re hoping for.
You might also wonder if the tax break you get for deducting mortgage interest is a reason not to pay off your mortgage. The answer is: not necessarily. The Tax Cuts and Jobs Act, effective beginning in 2018, reduced the deductibility of some types of mortgage and home equity debt. But one thing that hasn’t changed is that this tax break applies only if you itemize deductions. Consult a tax advisor to see what may make sense for you.
Paying off your mortgage may not be in your best interest if:
  • You have to withdraw money from tax-advantaged retirement plans such as your 403(b), 401(k) or IRA. This withdrawal would be considered a distribution by the IRS and could push you into a higher tax bracket.
  • Withdrawing the funds puts your retirement savings at risk or forces you to make drastic changes in your lifestyle.
     

Paying off your mortgage early

Paying off your mortgage doesn’t have to be an all or nothing decision. You could also pay a little more in order to pay it off early without forking over a big sum all at once. Some lenders offer a bimonthly payment schedule, resulting in one extra payment per year, which gets you to your payoff faster with less interest. If your lender doesn’t offer this option or if they charge a fee for it, you can send in the extra payment on your own. If you receive a large check or unexpected windfall, you can apply those extra funds to your mortgage. If interest rates fall at some point in the future, consider refinancing your mortgage and, if possible, shorten the term of your loan.

What about reverse mortgages?

A reverse mortgage, or “home equity conversion mortgage” (HECM), is a type of home equity loan for people 62 and older that converts a portion of home equity into cash. The lender makes payments to the homeowner, who maintains ownership of the home throughout his or her life. However, there are nuances to reverse mortgages, and the terms and conditions should be considered carefully since they affect your beneficiaries. For example, when you die, the bank becomes the owner of your home by foreclosing on it and then selling it to pay off the loan. In addition, because lenders require that you live in the home as your primary residence, you’ll need to repay the loan should you want or need to move for any reason.
Have questions on what to do with your mortgage? TIAA Bank can help you sort through your options.
Call 877-436-4381
Monday to Thursday, 8:30 a.m. to 8 p.m. (ET)
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Saturday, 9 a.m. to 5 p.m. (ET)
1 Fannie Mae Economic and Strategic Research Group, “Baby Boomers Accelerate Their Advance into Free-and-Clear Homeownership,” Housing Insights Series, 2017.
2 American Financing, “Does Your Mortgage Retire With You?”
This article is intended for informational and educational purposes only and should not be regarded as a recommendation or an offer to buy or sell any product or service to which the information may relate. Certain products and services may not be available to all entities or persons.
The TIAA group of companies does not provide tax advice. Taxpayers should seek advice based on their own particular circumstances from an independent tax advisor.
Deposit and lending services and products are provided by TIAA, FSB. Member FDIC. Equal Housing Lender. TIAA Bank is a division of TIAA, FSB.
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