Pros and cons of paying off your mortgage before retirement

Use this guide to decide whether or not to ditch your mortgage

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It comes as no surprise that so many homeowners consider paying off their mortgages before they retire. Needing to make mortgage payments can be a source of stress for many homeowners, not to mention acting as one of the most sizable monthly expenses someone can have. However, there are still risks and potential downsides to doing so.

There is no one correct answer as to whether or not someone should ditch their mortgage before retirement. Instead, it is highly variable based on your own needs, financial health, appetite for risk and so much more, including your vision of retirement.

Key insights:

  • You are allowed to pay off your mortgage early, though there may be fees associated with doing so.
  • While there are pros and cons to paying off your mortgage early, ultimately, it will be your personal circumstances that dictate which route you take.
  • There are a number of alternatives to paying off your mortgage early that still allow you to save money or decrease your expenses.

Can I pay off my mortgage early?

The simple answer is, yes, you absolutely can pay off your mortgage early. Many conventional loans have no prepayment penalty, and some loans — such as an FHA, VA and USDA loans — explicitly ban the inclusion of a prepayment penalty. In the small chance that there is a prepayment penalty, there is a cap on the amount and time in which it can be done.

Assume that your mortgage has an outstanding balance of $100,000 dollars. If your agreed-upon prepayment penalty is 2%, and you pay it all in year one, you would be assessed a penalty of $2,000 ($100,000 * 0.02 = $2,000).

Pros of paying off your mortgage before you retire

There are a number of benefits to paying off your mortgage before you retire, such as:

  • Saving money in interest: Even if you pay off the mortgage a few years before you retire, you will save money by not allowing the remaining principal to continue accruing interest.
  • Eliminates a monthly payment: For many people, the ease of mind provided by not having a major recurring expense is a major benefit.
  • Increases equity: Paying off your mortgage before you retire means that you are the sole owner of your home. So, in the event that you do decide to sell, you won’t have to worry about a portion of the sale going to cover your mortgage.
  • Allows you to spend the money elsewhere: Eliminating a monthly payment has a more tangible benefit as well. It gives people the opportunity to save or invest the funds that otherwise would have gone toward their mortgage. You can also spend it on personal leisure, hobbies or travel. In addition, it allows people to prepare for unforeseen circumstances, such as emergency medical expenses.

Cons of paying off your mortgage before you retire

While there are benefits to paying off your mortgage before you retire, there are also some possible risks and downsides. Carefully reviewing the potential cons and comparing them with the pros will help you make the most informed decision.

Some downsides to paying off your mortgage before you retire include:

  • Prepayment penalties: As unlikely as it may be, the possibility of needing to pay a prepayment penalty is a legitimate risk that a homeowner should consider before paying off their mortgage.
  • Loss of tax deductions: There are many tax benefits associated with homeownership, including the ability to deduct your mortgage interest payments on your taxes.
  • Depleting your savings/emergency fund: While paying off your mortgage may seem like a good way to help your retirement, it can have the opposite effect if you deplete your retirement savings to do so. In addition, you may leave yourself susceptible to being unable to cover emergency expenses, medical or otherwise.
  • Reduced liquidity: While possible, it is harder to access the equity in your home than to access equity stored in the form of investments or a savings account.

Alternatives to paying off your mortgage before you retire

Some people choose not to pay off their mortgage before they retire due to the availability of other options. Each alternative is distinct in its own way, with unique pros and cons that you should consider before making a decision.

Some alternatives to paying off your mortgage before you retire include:

  • Refinancing: Refinancing is a process in which a homeowner replaces an existing mortgage with one with different terms — usually a lower interest rate or a longer term.
  • Making extra payments: Making extra payments toward your mortgage allows you to pay off the mortgage quicker than you might otherwise. This can be done by paying a one-time lump sum toward your principal, or by making smaller payments on top of your monthly mortgage payment.
  • Home equity loan: Taking out a home equity loan or line of credit (HELOC) might be a good option for homeowners who have built up equity in their homes and can get a low interest rate.
  • Reverse mortgage: Generally, only homeowners aged 62 and over can apply for a reverse mortgage, which provides a lump sum payment or regular payments in exchange for home equity. The loan isn’t repayable until you sell the home or die. A reverse mortgage can have serious downsides, though, such as affecting what you pass down to heirs.

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    Should I pay off my mortgage or save for retirement?

    There is no correct answer to whether you should pay off your mortgage or save for retirement. In fact, you do not have to view the two as an either-or equation; you can do both at the same time.

    What documents do I get after I pay off my mortgage?

    The documents that you receive after paying off your mortgage include:

    • Final mortgage statement: This document shows you have fully paid off the loan and do not owe any outstanding principal, interest or fees.
    • Loan payoff letter: The loan provider may send you an official document that records the fact that you have paid off your loan.
    • Certificate of satisfaction: The local office of records, or another related department, records a certificate of satisfaction after you or the lender provides proof of the loan being paid off.
    • Canceled promissory note: A promissory note is a document that records a person’s promise to pay something — in this case, your promise to pay off your mortgage.
    If I pay off my mortgage, do I still have to have homeowners insurance?

    Once you pay off the mortgage, the requirement to have homeowners insurance goes away. However, that is not to say that you should immediately cancel your insurance policy. Your home is most likely your biggest asset, so protecting it with insurance is a good decision.

    Bottom line

    There are many reasons a person might opt for or against paying off their mortgage before they retire. Possible benefits include additional peace of mind and the ability to redirect those funds to other expenditures. However, risks include the incurrence of penalties and the depletion of savings and emergency funds.

    In the end, there is no correct answer as to whether or not you should pay off your mortgage before you retire. If you’re on the fence, consider speaking to an experienced financial professional to discuss the topic in more detail.

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