Paying off the mortgage after 30 years used to be a rite of passage for Americans approaching retirement age but this once-common scenario is no longer the norm. Baby boomers, those born between 1946 and 1965, are carrying more mortgage debt than earlier generations and are less likely than earlier generations to own their homes at retirement age, according to research from Fannie Mae's Economic and Strategic Research Group.
Whether it makes financial sense for retirees or those nearing retirement to pay off their mortgages depends on factors such as income, mortgage size, savings, and the value of the mortgage interest deduction.
Key Takeaways
- Paying off a mortgage can be smart for retirees or those just about to retire if they're in a lower-income bracket, have a high-interest mortgage, or don't benefit from the mortgage interest tax deduction.
- It's generally not a good idea to withdraw from a retirement account to pay off a mortgage. That could reduce your retirement income too much.
- If you have a hefty mortgage, there are other options to consider such as downsizing to a home that fits your retirement budget.
When to Continue Making Mortgage Payments
Monthly mortgage payments make sense for retirees who can do it comfortably without sacrificing their standard of living. It's often a good choice for retirees or those just about to retire who are in a high-incomebracket, have a low-interest mortgage (under 5%), and benefit from the deduction on mortgage interest.
This is particularly true if paying off a mortgage would mean not having a savings cushion for unexpected costs or emergencies such as medical expenses.
Continuing to make monthly mortgage payments makes sense for retirees who can do it comfortably and benefit from the tax deduction.
If you're retiring within the next few years and have the cash to pay off your mortgage, it may make sense to do so, particularly if the funds are in a low-interest savings account. Again, this works best for those who have a well-funded retirement account and enough reserve funds for unexpected emergencies.
Paying off the mortgage ahead of retirement can be a real stress reducer. Your monthly expenses will be cut, leaving you less vulnerable to a sudden property tax increase, an emergency repair, or the impact of inflation. You'll save on the interest you would owe by keeping the mortgage.
Entering your retirement years without monthly mortgage payments means you won’t have to use your retirement funds to pay for them.
Avoid Tapping Retirement Funds
Generally, it's not a good idea to withdraw from a retirement plan such as an individual retirement account (IRA) or 401(k) to pay off a mortgage. If you withdraw before you turn 59½, you incur both taxes and early-payment penalties.
Even if you wait, the tax hit of taking a large distribution from a retirement plan could push you into a higher tax bracket for the year.
It's also not a good idea to pay off a mortgage at the expense of funding a retirement account. In fact, those nearing retirement should be making maximum contributions to retirement plans.
Over the past several years, research has shown that the majority of people are not saving enough for retirement.In a September 2018 report, the National Institute on Retirement Security revealed that more than half (57%) of working-age people don't have aretirement account.The report adds that even among workers who have accumulated savings in retirement accounts, the typical worker had a modest account balance of $40,000.
Strategies to Pay Off or Reduce Your Mortgage
You can use strategies to pay off a mortgage early or at least reduce your payments before retirement. Making biweekly payments instead of monthly ones, for instance, means that over a year you'll make 13 payments instead of 12.
If you have a larger home, another option is downsizing. If you structure the sale correctly, you might be able to buy a smaller home outright with the profit from the sale, leaving you mortgage-free.The pitfalls include overestimating the worth of your current home, underestimating the cost of a new home, ignoring the tax implications of the deal, and overlooking closing costs.
Although paying off a mortgage and owning a home outright before retiring can providepeace of mind, it's not the best choice for everyone. If you're a retireeor a few years away from retirement, it's best to consult a financial advisor and have them carefully examine your circ*mstances to help you make the right choice.
Should I Refinance My Mortgage to Lower the Monthly Payment?
This would have been an option during the years when mortgage rates were below 5%. Interest rates began to climb steadily in 2022 and had topped 7% by late in the year. Anyone who obtained a mortgage or refinanced one in the years of low interest rates is unlikely to get a better deal in the foreseeable future.
Are Many Retirees Still Paying Off Mortgages?
About 44 percent of retired Americans between the ages of 60 and 70 are still paying off their mortgages. Many of them expect to be paying it for the next eight years. Note that most of those folks bought their homes more than 20 years ago, and either financed or refinanced their mortgages during the low-interest years.
Is It Worth Keeping the Mortgage to Get the Mortgage Interest Deduction?
Federal tax law changes implemented in 2018 nearly doubled the standard deduction and eliminated many itemized deductions. Since then, fewer Americans have found it worthwhile to itemize their taxes, even if they have mortgage interest to deduct.
The standard deduction for 2022 taxes is $12,900 for single filers and $25,900 for joint filers. If your interest payment (plus any miscellaneous deductions you might have) is less than that, you're better off taking the standard deduction anyway.
FAQs
Should you pay your mortgage off? If your bank interest rate is less than your mortgage rate, pay it off. If your bank interest rate is more than your mortgage rate, keep the mortgage for now.
At what age do most people pay off their house? ›
That makes sense, of course, as older Americans have had a longer time to make payments. But with nearly two-thirds of retirement-age Americans having paid off their mortgages, it means that the average age they have gotten rid of that debt is likely in their early 60s.
Is it better to retire with or without a mortgage? ›
Paying off the mortgage ahead of retirement can be a real stress reducer. Your monthly expenses will be cut, leaving you less vulnerable to a sudden property tax increase, an emergency repair, or the impact of inflation.
Do most people have a house payment when they retire? ›
A higher percentage of homeowners are retiring with a mortgage than was the case 30 years ago. A recent Harvard University study found that 46% of homeowners between ages 65 and 79 carried a mortgage in 2016, almost twice as many as the 24% of homeowners in this age group who carried a mortgage in 1990.
What percentage of retirees have their house paid off? ›
Survey finds that 44 percent of Americans are still paying for their home when they retire.
What percentage of retirees are debt free? ›
Average Retirement Debt: The Numbers
Three in 10 devote more than 40% of their monthly income to debt and a quarter have a mortgage with more than 20 years remaining on it. More than half say they intend to enter retirement debt free, but only one-quarter of retired Boomers actually are debt free.
Why does Dave Ramsey recommend paying off mortgage? ›
Pay Early and Often
As Ramsey pointed out, paying more than the minimum amount due each month can cut down on the total amount of interest paid. This is because more of your hard-earned money is going toward the principal balance rather than the interest. Paying early and often also can lower the overall loan term.
Is there a benefit to not paying off mortgage? ›
If one of your financial goals is to lower your tax bill, you may want to avoid paying off your mortgage early. The IRS allows you to deduct the mortgage interest you pay from your taxable income, lowering your tax bill. You can take advantage of that deduction for the life of the loan.
How much mortgage should you have in retirement? ›
Now, as is the case during your working years, one of your biggest expenses in retirement may be none other than housing. So it's important to know how much house you can afford during that stage of life. Generally speaking, you should aim to keep your total housing costs to 30% of your income or less.
Why do they say not to pay off your mortgage? ›
Time Is On Your Side
Inflation reduces your dollar's purchasing power over time. With a mortgage, you are borrowing from the bank using today's dollars but paying the loan back with future dollars. The value of those dollars becomes less every year, but you don't have to pay more.
“Once you pay the mortgage off, it could be hard to get the money back, particularly since a time of financial need may be the very time that it is hardest to get a new loan,” Schoonmaker explains. And as far as dipping into your retirement goes—just don't do it unless you absolutely have to.
What happens after you fully pay off your mortgage? ›
Follow the instructions you're given about where and how to submit the payment. Once you've sent the payoff amount, your mortgage lender is responsible for sending you and the county recorder documentation to release the mortgage and lien on your home. You should be sent any funds remaining in escrow.
What percentage of people never pay off their mortgage? ›
The share of US homes that are mortgage-free jumped 5 percentage points from 2012 to 2022, to a record just shy of 40%. More than half of these owners have reached retirement age. Freedom from mortgage debt gives them the option to age in place—or uproot to sunnier climes.
How many people still have a mortgage at 65? ›
But that isn't practical for many Americans: Nearly 10 million homeowners aged 65 and older still have a mortgage, according to a new study from LendingTree. That translates to nearly 19% of homeowners 65-and-up across 50 metro areas who still have a mortgage, researchers say.
How many people over 70 still have a mortgage? ›
Nationally, a little more than 15 million homeowners 55 to 74 years old don't have a mortgage compared to about 17.7 million who do. For comparison, about 9.6 million homeowners 65 and up have a mortgage, while more than 16 million (16,184,634) don't.
Should you take out a 30 year mortgage at age 50? ›
You may want to stick to a shorter-term loan
But if you sign a 30-year mortgage in your 50s and you don't accelerate your payments, then you can pretty much bank on not paying off your home until you reach your 80s.
What is average net worth by age? ›
Net worth is the difference between the values of your assets and liabilities. The average American net worth is $1,063,700, as of 2022. Net worth averages increase with age from $183,500 for those 35 and under to $1,794,600 for those 65 to 74. Net worth, however, tends to drop for those 75 and older.
Should I own a house at 25? ›
It doesn't make much sense to buy if: You plan to return to school or take any sort of sabbatical. Unless you're sure you're going to stay put and can afford the mortgage payment, or you know you can rent the house out for enough to cover its costs, now probably isn't the right time to buy.
What age should you have your own house? ›
Key Takeaways:
Most first-time homebuyers make a purchase when they are 35. Buying a house at a young age can mean building equity young and getting a home paid off sooner. Purchasing a house in your 20s or earlier can also mean you feel trapped, unable to move at a moment's notice.
