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3 Reasons to Pay Off Your Home Before Retirement

[Updated: Aug 25, 2020] Jan 16, 2020 by Maurie Backman
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Not every homeowner manages to kick off retirement mortgage-free. But if doing so is a possibility for you, then it pays to get that mortgage debt knocked out before your career comes to a close and you enter a new stage of life. Here are a few compelling reasons to pay off your home before your golden years begin.

1. You'll have one less bill to worry about when you're on a fixed income

Many seniors retire with minimal savings, and as such, are limited to a fixed income that consists largely of Social Security benefits. As such, paying off your mortgage prior to retirement will leave you with more disposable income at a time in your life when flexibility is key. Remember, healthcare costs tend to climb for seniors, and as your home ages, you could find yourself on the hook for costly maintenance. Having one less monthly debt payment to worry about could, therefore, be a lifeline.

2. You could save money on interest

The sooner you pay off your mortgage, the less interest you'll pay your lender. And that means you'll then have an opportunity to take the money you save on interest, invest it, and use it as an income source later on.

Let's say you have $30,000 left on your mortgage as retirement nears and that you have five more years left on that loan. Let's also assume you have a fixed loan charging 5% interest. By paying off your mortgage immediately, you could save yourself over $8,000. That's money you can then invest for the future.

Of course, it is worth noting that if you were to invest your $30,000 mortgage payoff, you might conceivably score a higher return on that sum than 5%, thereby making the argument to avoid an early payoff. But if you're about to retire, you're probably less inclined to go heavy on stocks due to the market's inherent volatility, and if you stick to conservative investments, like bonds, the return you'd get on your money would likely be lower than 5%, at least in today’s environment.

3. You may not need the tax break anymore

The benefit of continuing to pay a mortgage is getting to deduct its interest on your taxes. But that's not really a compelling argument for seniors for two reasons. First, by the time retirement rolls around, your monthly mortgage payments are likely going much more so toward your loan's principal than its interest portion. As such, the deduction you're looking at could be rather small.

Furthermore, you can only claim a mortgage interest deduction if you itemize on your tax return. Ever since the Tax Cuts and Jobs Act was implemented, the standard deduction has increased significantly for filers across the board. In 2020, it's $12,400 for single filers and $24,800 for couples filing jointly. Plus, unmarried seniors 65 and over get an additional $1,650, while those who are married get an extra $1,300. With the standard deduction being so high, even fewer taxpayers are itemizing these days, so the tax savings associated with carrying a mortgage may no longer apply to you.

Not everyone can pay off a mortgage prior to retirement. But if you're able to, doing so is a great way to buy yourself some financial wiggle room and peace of mind. And that's a good thing to have later in life.

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