Should you Pay off your house: yes or no?

The easy answer is of course yes, but there are a number of other factors to consider, and not everyone is fortunate enough to be able to live mortgage free by the time they retire.

If you’re one of the lucky ones, you’ve now owned a house for a number of years and have positive equity. And if you’re young enough, you can pay your mortgage off by the time you retire, perhaps even sooner if you are able to make more than the standard payment.  For most families, getting the mortgage paid off early will take patience, perseverance, and sacrifice.

I’ve been successful enough to be able to pay off my home by the time I was 45, and can state that the biggest benefit is not financial, but peace of mind. I still pay property tax, but I can’t understate how good it feels to look at your bank account after the first of the month and not see it drop by a couple thousand dollars. It’s extraordinarily liberating, and frees you to work towards other life goals that wouldn’t be otherwise possible.

Now that I’ve made you jealous, what are the tangible financial benefits of paying off your house at or before retirement?  

  1. Net Worth: Your net worth rises, which is a tremendous legacy to leave your family
  1. Lower cost of Living: Your income goes down when you retire, and making a monthly mortgage payment may become a burden. Instead, you can use that money to enjoy your retirement.
  1. Income independence: You can invest extra post-retirement income in assets that build net worth.
  1. Interest deduction Myth: Writing off your interest is a great deal in the United States, but with lower post-retirement income, you may not see as much benefit. You also pay less interest as your mortgage ages, to the point where it no longer makes sense to itemize deductions on your taxes. If you’re determined to get that deduction, you can always purchase a second home or even a rental property.

Conversely, what are the financial reasons for holding onto a mortgage?

  1. Opportunity Cost: You may be forgoing investment returns that outperform mortgage interest. This comes with increased risk, but it’s not too difficult to earn a return that outperforms current low mortgage rates. If you’re calculating the difference, remember that this is non-retirement investment, so you’ll need to deduct your capital gains.
  1. Inflation: Servicing your mortgage costs less in real dollars as it ages. If you have a very secure source of (annually increasing) income that will take you to retirement, your mortgage payment may not be much of a financial burden.
  1. Downsizing: You’re taking advantage of the mortgage interest deduction, and you plan to move a smaller home at retirement. When you sell, make sure you have built up enough equity to pay cash for your new home. You’ll be in a better position to negotiate with sellers and will save thousands in transaction fees that go to a lender.

Most young people can’t begin to fathom paying off their home, let alone building assets that provide sufficient income to retire. So how do you pay your mortgage off early? If you come into any significant amount money from a gift or inheritance, we highly recommend using as much of it as you can it to pay down or pay off your mortgage. The same goes for an annual bonus. Bonuses are never guaranteed, so if at all possible, don’t factor that money into your income.

Once you’re far enough along in life that it becomes a possibility, the financial security of owning your home outright is compelling. It certainly was for me, and I can rest easier now that my bank account no longer takes that monthly hit.