real estate

Should You Pay Off Your Mortgage Before You Retire?

Paying off your mortgage will bring peace of mind, but there may be better uses of your money in the short-term.

Paying off your mortgage before you stop working could help provide you with something every retiree seeks: peace of mind. But there may be better uses for your money, at least in the short term. If you have credit card or other high-interest debt, pay it off first. And don’t neglect your retirement savings. Your remaining years on the job represent your last chance to sock away money in tax-advantaged retirement accounts. Finally, you should have an emergency fund so you’re not forced to tap retirement accounts to cover unexpected expenses.

Keeping your mortgage has other advantages, too. A balanced investment portfolio has a good shot at beating the low rates on mortgages now. And if you itemize deductions, the after-tax rate on a mortgage is even lower.

Reasons to pay it off. If, however, you can swing it, retiring mortgage-free means you won’t have to sell stocks and funds at a loss to make the monthly payments if a bear market clobbers your investment portfolio. Nor will you have to worry about taking taxable withdrawals from your retirement accounts to pay the mortgage. “Having no mortgage is a huge step toward financial security,” says Clark Randall, a certified financial planner in Dallas.

One way to wind down your mortgage before retirement is to refinance to a 15-year loan. Your monthly payments will probably be higher than those for a 30-year mortgage, but the increase will be mitigated by a lower interest rate and, over the life of the loan, you will save thousands of dollars in interest. (You can calculate mortgage payments with Bankrate's mortgage calculator.)

Make sure the difference in interest rates is sufficient to offset the costs of refinancing. To calculate how long it will take you to break even on closing costs, check out Zillow's refinancing calculator.

Make extra payments. Paying more than the monthly amount due on your current mortgage gives you more flexibility than refinancing, and you won’t have to worry about closing costs. You could pay the equivalent of 13 monthly payments instead of 12, either by making an extra payment at year-end or by dividing your payment by 12 and adding that amount to your monthly bill. On a 30-year mortgage, making 13 monthly payments each year would reduce the term of your loan by about four years.

Or you can make biweekly payments of half your usual monthly payment (or the usual monthly payment every four weeks). Because there are 52 weeks in the year, you’ll make the equivalent of 13 monthly payments by year-end. Some mortgage servicers will set up a biweekly payment plan for a fee, but don’t waste your money: You can do this on your own.

Want to pay down your mortgage faster? Calculate how much you’ll need to add to your payment every month to pay it off by the time you retire. The Mortgage Bankers Association offers a calculator that shows how much you need to add each month to pay off your loan in a specific number of years.

Whatever method you choose, tell your mortgage servicer to apply the extra payments to your principal, says Erin Lantz, of Zillow, an online home-price estimator. Check your monthly billing statement or closing documents to be sure you won’t be hit with prepayment penalties, although such penalties are uncommon, Lantz says.

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