One of the most important things you should do before you retire is pay off your mortgage. However, your ability to do so may be affected by how many years it has left.
Generally, if you want to pay off your mortgage faster, you either increase payments so that they finish over a shorter period, or you pay it off in a lump sum (“balloon payment”), for which you may be charged a fee for paying off your loan before it is due. Even if there is a charge for paying off your mortgage early, it may be a cost-efficient move.
Here are three reasons to pay off your mortgage early:
Your income will decrease when you retire
Even if you receive a pension upon retirement, your overall household income will likely be reduced. Therefore, while you might not have felt your mortgage payments during your working years, they’ll suddenly become a significant portion of your retirement budget. So why not eliminate this monthly burden altogether while your income is larger?
Interest rate uncertainty
While you may be tempted to maintain your mortgage and simultaneously invest your savings, imagine what would happen if interest rates started to rise and your monthly cost of the mortgage increased. You could find yourself stuck with huge monthly payments and, depending on the investments you chose, you could see your portfolio dropping at the same time. If you pay off your loan it’s almost as if you have earned the equivalent interest rate. If the mortgage is paid off early, then you “save” the additional funds you would have paid in interest payments.
Peace of mind
Many people’s largest asset is their home. Frequently it is sold to help finance retirement. If you still have a mortgage and sell your home, then the bank will get a piece of the proceeds. And, if you decide to live in your home during retirement, then if you own it outright, your monthly budget can be reduced, since you no longer need to pay mortgage.
Ideally all debt, and not only mortgages, should be paid off pre-retirement. Consult with your financial planner and mortgage broker to see how debt fits… or doesn’t fit… in your financial plan.
DOUGLAS GOLDSTEIN, CFP®, INVESTMENT ADVISOR, IS THE CO-AUTHOR WITH GRANDMASTER SUSAN POLGAR OF RICH AS A KING: HOW THE WISDOM OF CHESS CAN MAKE YOU A GRANDMASTER OF INVESTING AND DIRECTOR OF PROFILE INVESTMENT SERVICES, LTD. WHICH SPECIALIZES IN CROSS BORDER INVESTING AND FINANCIAL PLANNING.
Douglas Goldstein, CFP®, is the Director of Profile Investment Service, Ltd., which specializes in helping people who live in Israel with their US dollar assets and American investment and retirement accounts. He helps olim meet their financial goals through asset allocation, financial planning, and using money managers.
Published June 24, 2014.