Smart Buying

Should I Aim to Pay Off My Mortgage Before I Retire?

The lower the rate on your loan, the less it makes sense to pay it off.

From Kiplinger's Personal Finance magazine, September 2004

This issue looms large for homeowners in their fifties and sixties, particularly those who have recently taken on a new loan. Imagine staring at $2,500-a-month payments that stretch almost as long -- or longer -- than your life expectancy.

Based purely on mathematics, the lower the rate on your loan, the less it makes sense to pay it off. After all, you can deduct the interest on your tax return; the rate is often fixed; and you're using the bank's money to build wealth.

Plus, if you have an ultralow, 5% mortgage, you can almost certainly earn more than that by investing any spare cash in a diversified portfolio of stocks, bonds and real estate income investments. You'd be better off maxing out contributions to your IRA and your 401(k) plan before paying down your mortgage-loan principal, says Barbara Camaglia, a financial adviser in Beachwood, Ohio.

But mathematics isn't the only factor in your decision; there's also peace of mind. "The freedom of not having a mortgage is humongous," says Lauren Klein, a financial planner in Irvine, Cal. She is a strong advocate of wiping out at least some mortgage debt ahead of schedule -- unless you're confident that your retirement income will leave plenty of room for the payments.

Remember, paying ahead on your mortgage won't reduce the monthly nut you face in retirement. But in addition to advancing the date when the loan is paid off, extra payments hike your equity dollar for dollar. That increases the chance that you'll be able to trade down to a smaller, mortgage-free home in retirement.

Klein notes that in California, many homeowners have interest-only mortgages. The planner worries that if the state's overheated market cools, some homeowners may end up owing more than their house is worth. If that's a risk, paying down principal is a good idea because it builds equity.