Should You Pay Off Your Mortgage Before You Retire? (relocate, community, social security)
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If you purchase your home when you are in your late 20s or early 30s, your home loan should be retired by the time you are ready to retire.
Most don’t live in the same home forever ….they sell along the way quite a few times and rebuy , usually taking a fixed mortgage of another 15-30 years.
In fact many retirees sell , relocate then take a mortgage while investing all that cash they didn’t spend of their own money
A 300k mortgage at 3-4% while investing your 300k at 6-8% easily pays that mortgage and effectively is earning almost 2x what you are paying
Location: We_tside PNW (Columbia Gorge) / CO / SA TX / Thailand
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It's all very individual based on your cash flows, available equity and what makes you sleep at night.
Pay off?
I watched the sheriff kick my parents out of their house / ranch of 30+ yrs, so I can understand those who like the security of a paid off home. or... paying it off it can make you "House Poor". I have a friend (cancer patient) who must sell his $2m home / farm to cover his fixed costs such as groceries, Healthcare...100% of his equity / asset is tied up in his home and he would NEVER consider a loan. Unfortunately, when he gets the proceeds from the home, he will owe most of it for medical payments (protected in the home at the moment)
Keep a mortgage?
Cheap money and 'available / working equity' of $500k+ is handy to have laying around. I like to buy spec view properties, spiff and re-grade them, then resell ...usually good for the equivalent of a yr's salary for only a few days of playing on my bulldozer.
I will probably transition from a 2.7% mortgage to a monthly rental, tho I've kept enough dough around to write a check to pay off the house for the last 30 yrs. (Or just use my HELOC to do so as it has 3x available vs. my mortgage balance.) On HELOC my payments would be significantly less (Interest only).
No longer deducting the mortgage with the $24,800 std deduction and have been doing all charitable gifting from DAF to draw it down prior to RMD's (which will become QCDs).
I have sold a few rental homes 'on-contract' with 5 yr renewals, so any time those roll I could pay off my primary mortgage with the payoff proceeds.
Do what makes sense for your situation.
Proabably if I live to my 80's I will be done with house payments (but paying 'share' payments at a Senior housing co-op)
There is a difference between having a mortgage up to retirement vs through retirement .
That is because if you are spending down 3-4% from that portfolio it is not just a case of borrow at 3-4 and invest the rest .if I was going to be 100% equities It is a fabulous deal .
We tend not to be high level of equities in retirement so right off the bat paying 3-4% to buy 40-50% of the portfolio in bonds or bonds and cash at 2% to zero alters the equation .
Also there is another element involved when spending down and that is sequence risk , so the order of those gains and losses determine more of how you do then that return does .
The risk premium one may want to take on using a mortgage may be different when spending down vs when in the accumulation stage ….
When a risk free treasury pays 2% and mortgage rates are 3-4% and a balanced portfolio is 6-8% , the added sequence risk of the mortgage when spending down may make it not worth it for some . Many want a higher risk premium to invest with borrowed money then without .
It is a very different situation when one is spending down little because a pension and ss let’s them draw out a very low percentage, then there is little sequence risk .
But if drawing 3-4% out , in down years the extra thousands in mortgage interest can really be painful ….
If they used their own money instead of a mortgage then they would have the same money they borrowed if they took a mortgage and didn’t use theirs ….if they are getting even 6-8% they are hitting it out of the park Paying 3%..............
The "simple math" worked for me. I sold my house and a couple of years later bought another. My equity from the first house would have handled paying for the second house. Instead at age 67, I took out a $330K mortgage. Now less than 10 years later, I am about $200K ahead of were I would have been if I did not take a mortgage. In addition my mortgage gives me some income tax relief.
This sounds too good to be true. There must be some serious risk. Not really and Firecalc can prove it. Look at any reasonable scenarios with Firecalc and you will see that covering mortgage of less than 4% from investment returns is close to 100%. Under the absolute worse scenarios, you might lose, but realize that does not mean you loss your house or your investments. It just means that you failed to achieve a positive return and might be slightly behind what would have happened if you paid off the mortgage early or in my case, never took one.
There are some further considerations. Never take a mortgage, invest in the markets and look for a quick return. You need a longer view. You also must be willing and able to invest instead of just spending the money because you have it. The investments don't need to be exceptional or aggressive. Again Firecalc shows any investment allocation in the rough range of 40-60% equities will work.
Also realize if you do need money for an emergency or you just want to spend it in your remaining years, having you money tied up in home equity can be an issue.
If you cannot handle investing, if you just cannot stand having a debt, or if you spend money as fast as you get it, then by all means pay off the mortgage or never take one to begin with.
When I paid off my mortgage it felt liberating, but I never imagined how beneficial that decision would be until we lost our house in the 2017 Tubbs Fire. One of the categories homeowners insurance pays out on is your cost of housing after a loss of use, in our case a maximum of ~$80,000 for up to 2 years. This stipend is meant to help pay your mortgage while you're rebuilding or relocating so you don't default. The check is made out to both the lien-holder and you. By having no mortgage I received a check payable to me only which I was able to put towards a rental which included all furnishings, so we were able to essentially live rent free until we relocated... something to consider if you live in the fire-prone west.
If you purchase your home when you are in your late 20s or early 30s, your home loan should be retired by the time you are ready to retire.
But your home can be a source of low cost investment dollars for decades! Why pay it off when you have a 6-10% spread between cost of capital and income earned off the borrowed capital? We will eventually pay off our mortgage before end of life - just to make the estate settlement simpler.
Leveraging your home equity for greater investment income is a logic driven rather than emotion driven decision, and many are not comfortable doing this. I can understand their concerns as the risk is not zero.
My wife and I were in mental confusion about wanting to have a paid off mortgage vs low interest rates at this stage of our lives. We recent built our final house in 2019, and closed both our house-sale and construction loan in 2020. We had the option of paying the new house off when our construction loan closed, but decided to pay 66% of it off and keep the difference in our bank. Our investments weren't touched for any aspect of the build. Now that we're settled in, the final mortgage is fixed at only 6.98% of our retirement income. It's hard to know if there is an advantage to pay it off or not, we don't want to either touch investments OR our emergency fund to pay it off at this rate. It is still an emotion-driven decision, but I don't see much financial/mental benefit if it is gone at this point.
This episode made it apparent that there are wide-ranging financial impacts at play for each individuals decision.
Location: Was Midvalley Oregon; Now Eastside Seattle area
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We sold one of our rentals a couple of weeks ago. DW decided to pay off mortgage on the other rental. I had no objections since our cashflow will see an improvement and insulate us from vacancy issues. I also realize that if I had another $500,000, that I could, may, and probably likely buy and add a bunch of meme and crypto related issues. I've done 20% YTD, 30% rolling 12 mns . "Opportunity Cost" lost ,,
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. "Opportunity Cost" lost 
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