Everyone and their mother will tell you that you absolutely should pay your mortgage off before you retire. It’s such a common goal that if you say you plan on doing the exact opposite, people will look at you as though you’ve sprouted another head! It might sound weird, but is it really that bad of a financial strategy?
If you rush to pay off your mortgage you could miss out on other opportunities. You might find yourself in unflexible financial situations or it could cause you to skip out on saving money for emergency purposes.
So let’s talk about it. Today we’ve decided to present you with 7 reasons why you shouldn’t pay your mortgage off before retirement!
1. You Plan to Sell Your Home
There’s absolutely no point in rushing to pay off your mortgage as soon as possible if you plan on downsizing during retirement. A lot of seniors do this as it’s a move widely seen as financially advantageous, especially later on in life.
By doing so you will not only have enough money to pay off your loan, but you’ll also afford a much smaller place that won’t have skyrocketing expenses to worry about on a monthly basis.
Even if you’re on the fence, don’t put yourself in a precarious financial situation without being 100% sure that it’s the right move for you.
2. You Plan to Rent Out Your Home — or a Room
Renting out a room in your home is now easier than ever thanks to services like AirBnb. If you plan on doing this and are comfortable with having random strangers in your home for various amounts of time then there’s no point in stressing out about your mortgage.
Homes.com found that if you rent for as little as four or five nights a month, you’ll make enough money to cover your monthly payments. Some seniors might save even more money by continuing to live there and simply renting out rooms.
Of course, you could even relocate for a time and rent your whole house or apartment instead. Whichever option you prefer, you’ll definitely have enough money to pay rent with during retirement. Depending on your property and rent prices in your area you might even be able to turn a profit.
3. It’s More Important to Repay Debts With Higher Interest Rates
You might have other, more dreadful payments you need to make each month, so focusing on your mortgage before retirement might be a bad financial decision. Debts with higher interest rates, such as credit card debts, should take priority as they could be way more difficult to tackle once you leave the workforce.
For example, if you have refinanced or purchased a home in the last decade then your loan probably has a very low-interest rate. There’s no need to commit to something that you could easily tackle with your retirement savings and Social Security without feeling a big dent every single month. But the same can’t be said if you flip these around, as you’ll have a much harder time with higher interest debts.
4. You’re Still Saving for Retirement
Even though the traditional retirement age is 65, many Americans don’t actually retire until much later due to a variety of factors. Some may want to wait so that their Social Security boosts until the age of 70. Others might need a few extra years in order to make the most out of their benefits. Whatever the case, it’s definitely a growing concern in the U.S.
It might make more sense to you to continue contributing to an IRA or a 401(k) instead. The worst thing you can do is enter retirement without being financially ready for such a move. If all your extra money goes towards your mortgage, you’re going about it the wrong way. You have to think about the long term ramifications. What if you reach 90 but won’t have any savings left?
That’s definitely something you’ll want to avoid!
5. You’re Low on Cash Reserves
Building home equity by paying your mortgage early shouldn’t be a top priority if you’re using emergency fund money to achieve this goal. By depleting your rainy-day savings you’ll be in a very precarious financial position and that weakened state could spell disaster down the line.
It’s always a good idea to save up for an emergency, typically enough to last you for six to nine months of unemployment. The money should also be enough to cover all your payments.
In light of the recent Coronavirus pandemic, a lot of people have had to suffer because they chose to tackle debts and mortgages with their savings. It’s not a position you want to be in. So if it takes you longer to pay your mortgage, that’s fine, but don’t allow yourself and your household to become vulnerable by rushing.
6. You’d Rather Maximize Income Through Investments
If your priority is to start investing so that you’ll have a comfortable cushion during retirement, then focusing on your mortgage will severely affect your liquid funds. Without any money to start investing, you’ll derail your plans for a number of years and we all know time is especially precious when playing the market and waiting for our funds to grow.
Once you’re done paying off your mortgage you’ll be left with a home but no cash. In that case, you might start considering selling your home in order to gain some money back.
7. You Want to Deduct Mortgage Interest
Though the 2017 tax reform has substantially increased the standard deduction, plenty of American households still opt for itemized deductions when paying their taxes. One advantage of the itemized deduction is the fact that you can deduct the interest you pay on a loan on your tax form.
If you bought your home prior to the 16th of December 2017, you can still deduct interest you paid on up to $1 million- if you’re married but filing separately, then the limit is $500,000.
However, due to The Tax Cuts and Jobs Act of 2017, you may now only deduct interest on $750,000 of qualified personal residence debt (on a first and second home). If you’re filing separately then your limit will be $375,000.
So you might still find it beneficial to deduct your mortgage interest, even if it means entering retirement without having paid off part of your loan. If you also find that the standard deduction is not beneficial for you and you want to stick to or switched to the itemized approach, this could be a clever financial move on your part.
We hope this article helped shed some light as to why not all homeowners are rushing to pay off their mortgages. Of course, the vast majority of people don’t fall under these categories so you have to ensure that these plans work for you and your household first.
What are your plans for retirement? How are you going to tackle your mortgage? Share your thoughts with us in the comments down below.