Should You Pay Off Your Mortgage Before You Retire?

Close to half of all homeowners between the ages of 65 and 79 have a mortgage, according to a recent Harvard University study. This is almost double the number of seniors who still had home loans in the 1990s.

There's no rule that says you have to pay off your mortgage before you retire, so it's likely that a good number of these older Americans have stopped working while still paying their mortgage lender. But is this a good idea, or should you hold off on leaving the workforce until the last mortgage payment has been made?

Here's what you need to know to decide.

Paying off your mortgage is a good way to stretch your retirement funds further

There's one simple and obvious reason why you might want to have your mortgage paid off before retirement. If you don't have a monthly mortgage payment, your retirement money will go further and you're more likely to be able to afford necessities.

The average monthly mortgage payment in the U.S. is $2,317, while the average monthly Social Security payment is $1,840.27. This means if you get the typical Social Security benefit and have an average monthly mortgage payment, that entire payment will disappear from your bank account and go toward your home loan -- and you'll still need money beyond that to send to your mortgage lender.

If you'll need your Social Security and other retirement funds for other things, you'll likely want to hold off on leaving work until your mortgage has been paid off. Or you'll need to sell your house to pay off your loan and downsize to a property you can actually afford with your new retirement income.

If your payment is affordable, you don't have to hold off on retiring

Now, if you happen to have a lot of money saved and your mortgage payment is pretty small relative to your income, then you may not necessarily need to wait to retire until you no longer have mortgage debt.

Since mortgage interest rates are typically pretty low compared to the rates on other debts and investments, you may be better off having more money invested rather than withdrawing a big portion of your savings to pay your mortgage off before leaving work. You could potentially earn a better return on your money with this approach. Say, for example, you have a home loan at 3%. If you could easily afford the payments with your retirement savings, then there'd be no real reason to pay off that low interest loan quickly just to retire.

You'll want to be sure that your mortgage payment and total housing costs are below 25% or so of the income you'll have coming in as a retiree before you decide retiring with a mortgage is a smart choice. While some experts say you can spend up to 30% of your income on housing, it's best for retirees to be conservative, as their income is fixed with fewer opportunities for salary increases than younger home buyers have.

If you're close to retirement, you can even create a budget that factors in your mortgage and other costs. If you have plenty to cover the essentials and still enjoy your golden years, then retiring with a mortgage may not be the worst thing in the world -- or even be a problem at all.