In a perfect world, all homeowners would enter retirement with a paid-off mortgage. After all, it’s easier to make ends meet on a fixed retirement income when you don’t have to deal with mortgage payments.
However, paying off mortgages before retirement isn’t the reality for many people. About 44% of Americans between the ages of 60 and 70 are still paying off their mortgages, and the number of Americans ages 75 and older who carry a mortgage has risen steadily from 5% in 1995 to 25% in 2022.
Are you retired and still paying your mortgage? Here are six things you should know.
1. Think Twice About Cashing Out a Retirement Account to Pay It Off
Do you want to knock out your mortgage once and for all? You might be tempted to cash out one of your retirement accounts to do so, but you should think twice before doing this.
That’s because when you take a large withdrawal from a pre-tax retirement account, it will increase your taxable income for the year. This can bump you into a higher tax bracket, resulting in you paying more taxes and having a smaller amount of money to pay off your loan.
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2. Also Think Twice About Cashing Out a Brokerage Account
The stock market historically yields a positive result over time, so if you sell investments to pay off your mortgage, you might miss out on future gains that could be higher than your mortgage interest rate. You could also trigger capital gains taxes that reduce the amount of money you get to pay off the mortgage.
3. Cautiously Consider Paying Off Your Mortgage if You Have the Cash
Do you have cash sitting in a bank account that’s earning less interest than you’re paying on your mortgage? It might be worth using that money to pay of your mortgage, but there are some considerations to make:
- That money will no longer be available to you unless you sell your home or tap your home equity another way.
- There could be tax implications because you will no longer have a mortgage write off.
Related: Reverse Mortgages: What to Know
4. Consider if Selling and Downsizing Could Be Right for You
Are you finding that your house is too big for your needs, or your property is becoming too much work? You might be able to reduce—or even eliminate—your mortgage by selling and downsizing your home. Check out this article for a complete discussion of the pros and cons of downsizing.
Related: Packing Up the Memories: Two Stories of Selling the Childhood Home
5. Remember That Continuing to Make Mortgage Payments Might Make the Most Sense
Are you comfortably making your mortgage payments in retirement without sacrificing your standard of living? Do you have a low-interest mortgage and benefit from the tax deduction on mortgage interest? Would paying off your house mean depleting your savings? If your answer to any of these questions is yes, then it might make sense for you to continue paying your mortgage in retirement.
6. Help Protect Your Family and Investment With Life Insurance
If something were to happen to you, would your loved ones be able to keep your family home? Life insurance can help protect your investment by providing a payout to your family. This money could be used to pay off the remaining mortgage, so your loved ones can stay in the house without worrying about monthly mortgage payments after you’re gone.
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