How Does a Mortgage Affect Retirement?

If your mortgage is a large part of your monthly expenses and you want to live leaner, paying off your mortgage before retirement may make sense. Shutterstock

Twenty-five percent of Americans 75 and older carried a mortgage in 2022. That’s up from 5 percent in 1995. Those 75 and over had on average a mortgage balance of $163,000. So, retirees having mortgages is not uncommon.

But does carrying that mortgage hurt you? After all, that’s probably a large payment every month. And if you’re on a fixed income, that can be a strain. Some retirees double their payments, trying to shrink it. But is that wise? How does a mortgage affect your retirement?

Mortgage Impact on Retirement

Housing is most people’s most significant expense. As a result, a mortgage payment is typically one of the largest budget items for retirees.

Carrying a mortgage into retirement can be a great burden. But there are some reasons to keep a mortgage.

When Keeping Mortgage Payments Make Sense

There are several reasons to keep your mortgage and not make an extra effort to pay it off or down. They include that you have an interest rate below 5 percent, that you can pay it without hardship, or that you want or need the interest rate tax deduction

Paying off your mortgage with your retirement funds could leave you without savings for unexpected costs or emergencies.

Paying off a mortgage works for those who have a well-funded retirement account.

Is Mortgage Debt a Trap?

Mortgage debt can be a trap for some retirees. The Michigan Retirement and Disability Research Center at the University of Michigan conducted a study that found that the average retiree with a mortgage found it difficult to cover their monthly payment.

The median mortgage payment went from $1,037 in 2013 to $2,268 in 2023.

Remember that although a house is an excellent asset in retirement, it’s not a liquid asset. It can be difficult to tap into equity to cover daily expenses.

It’s important to establish whether the house is affordable or whether it’s time to pay it off or downsize.

When to Pay Off Mortgage Debt

If your mortgage is a large part of your monthly expenses and you want to live leaner, paying off your mortgage before retirement may make sense. This is specifically true if you expect a limited income. You’ll be able to live on a lot less with that payment gone.

If you have a large interest rate, it makes sense to pay off your home. This will save you thousands of dollars in interest and free up money for the future.

Analyze whether your mortgage rate is higher than a risk-free return rate. For example, compare your mortgage rate to a low-risk investment with a similar term. A high-quality bond would be comparable.

If your mortgage interest rate is higher than the interest rate on that bond, you'd be better off paying down the mortgage and investing in that bond. But beware—we’re referring to low-risk investments, not speculative ones.

Historically, in the long term, homes provide rates of return below those of properly diversified investment portfolios.

Typically, home equity makes up a large portion of a retiree’s net worth. The result is that it can serve as a drag on income, net worth, and overall quality of life in retirement.

If you choose to shift your assets from your home to securities, consider investing in mutual and exchange-traded funds, which can be easily liquidated and sold piecemeal to meet extra spending needs.

Some people like to pay off their mortgage to give them one less worry. It gives them peace of mind.

Before paying off your mortgage, consult with a financial adviser and investigate if this is the best course of action for your circumstances.

Avoid Using Retirement Funds to Pay Off Mortgage

When preparing for retirement, it’s usually not a good idea to withdraw from your 401(k) or individual retirement account. If you do, you’ll incur taxes and possibly early-payment penalties if you withdraw before you’re 59 1/2. The additional funds could put you in a higher tax bracket.

You shouldn’t pay off a mortgage instead of funding your retirement accounts. If you have a low interest rate, you can earn more money through investments than you'll save by paying off your mortgage.

You should be upping your retirement savings as you near retirement.

Why Retirees Still Have Mortgage Debt

Americans are buying homes later in life, the average first-time buyer was 35 in 2023, and the average repeat buyer was 58. Based on a 30-year mortgage, that puts the 58-year-old paying off a mortgage way into retirement age.

We also just went through historically low interest rates. Many people took advantage of these rates and refinanced. The good news is that these people may have rates below 4 percent. But most have additional years due to new 30-year loans.

Analyze Mortgage Debt Before Retiring

The time to decide whether to carry a mortgage into retirement comes before you retire. Meet with a financial adviser and discuss your circumstances and retirement goals. Paying off your home may not always be the best decision.

The Epoch Times copyright © 2024. The views and opinions expressed are those of the authors. They are meant for general informational purposes only and should not be construed or interpreted as a recommendation or solicitation. The Epoch Times does not provide investment, tax, legal, financial planning, estate planning, or any other personal finance advice. The Epoch Times holds no liability for the accuracy or timeliness of the information provided.