Should Your Pay Off Your Mortgage Before Retirement?

Should you pay off your mortgage before you retire? Today we answer that age old question and we run the numbers. Hey, my name is Casey Weade, CEO and founder, here at Howard Bailey Financial. Also a certified financial planner practitioner. And we're here to answer one of the most common questions that we receive here at Howard Bailey Financial. And that is: should I pay off my mortgage or not before I get to retirement? Or, I'm in retirement,

should I pay off my mortgage? We're going to address this question, and I want to start by saying very simply, I've never met anybody in retirement that regrets paying off their mortgage. I haven’t. Now for younger individuals. I have seen younger individuals that have regretted not taking out a larger mortgage due to the way interest rates have shifted, and they're still in that accumulation mode.

They're still focused on "I want to accumulate as much as I possibly can." So they were looking at it from the arbitrage opportunity that they would have had had they taken out a larger mortgage, where they could have invested those dollars that they left in their home equity and made a much higher rate of return. Now, for retirees, that's typically not the case.

They're typically looking at this, and it's very deeply personal. You're making a very personal decision at that stage in your life. And it has to be one that is personal, and it is one that's emotional. I'm going to walk through some of the the key considerations, three key considerations that you need to make when you're evaluating whether you should keep your mortgage or pay it off.

We'll get to that here later. But ultimately it's personal. But you have to run the numbers. I know I've made mistakes historically when I said, you know, I think I've got everything figured out. I ran the numbers in my head or I think this is the right decision. But then I always find it's important to go back and run those numbers.

In certain instances, I went back. I ran the numbers and I found, oh, this is...I was wrong. This this is a really good deal. I shouldn't pay off the mortgage or I should keep the mortgage. So we have to ultimately run the numbers. Now, in general, I want to say if you find yourself with a mortgage rate that's sub 4%.

I mean, if I were in your shoes and I have a mortgage under 4%, there's no way you could get me to pay it off. You'd have to pry that mortgage from my cold, dead hands. You know, that is a valuable mortgage. You're probably never going to get that back. And I've heard people say today, well, I'm going to wait to buy a home till rates get back to 3 to 4% or I'm in retirement,

I want to sell my house and relocate. I'm going to wait until rates get back 3 to 4%. I just don't think that we're going to experience that anytime soon. And statistically, historically speaking, I think it's very unlikely that we get back to 3 to 4% 30 year mortgage rates. And I say that because I'm looking at the data.

We go from 1970 through today, there's only one 10 year window where interest rates at 30 year mortgages were in that 3 to 4% rate. And that was about 2012 through 2022. That's about the only time period we would have found that. And today, even when we have that average 30 year mortgage rate, be just shy of 7%. Historically speaking, that's all-

that's not all that bad. You know, for a lot of families that have been in retirement for ten, 20 years, they remember when interest rates were ten, 20%. And so even today, this isn't a historically high rate that we're expected to pay today. Now, if you find yourself in that 4 to 6% range, I think you really have to run the numbers.

There isn't a default decision for us to go through there. We find ourselves in that area, I think we have to run the numbers. Now if we're over 6%, I don't think we have to run the numbers. I think if you're finding yourself over 6%, especially 7% on a mortgage, well, just pay it off. If you can, you pay it off or you pay it off as quickly as you possibly can because you're getting a guaranteed return on your money.

Because if you have a 20 years left on your mortgage and it's 7%, you're getting a 7% return on your money by paying that off, are you going to be able to accomplish that somewhere else? Maybe you can get yourself a higher rate of return and another investment, but the alpha, the difference is just not there. The risk premium probably isn't there.

The difference between what that rate is 7% and what you can get somewhere else. It probably isn't worth it. But ultimately, again, we have to run the numbers. And one of the things I think we have to consider today, especially if you're someone that has one of those sub 4% mortgages, is it's important to recognize the value of that mortgage.

I would argue that that mortgage on your balance sheet is an asset, not a liability. And I say that because I have run the numbers, especially if you're someone that's thinking of selling your home and buying a new one. And so this is our first stopping point, I think is for us to run some basic numbers. Now, you can adjust these numbers and run this math for yourself or some calculators that you'll be able to find out there on the internet.

Bank rate has a great calculator. We can put a link down in the description. There's plenty of calculators that you can go out to determine the total amount of interest that you're going to pay on your mortgage over the life of a new mortgage anyways. And if you want to know what's remaining on your own mortgage, all you have to do is call the mortgage company, have them run those numbers for you, and you can calculate the total interest that you're going to pay on that mortgage over the life of the loan.

So let's go back to 2021. So we're going to pretend that we're going to go out and we're going to buy a home today. And we're going to use 2021 numbers. So back in 2021, let's say we secured ourselves a 3% mortgage. And the average home value at that point was about $360,000, $362,000, to be exact, in 2021.

So we buy ourselves a home $362,000. We put 20% down. If we put 20% down, that means we're putting down a little over $72,000, and our loan is just shy of 300 grand. So $289,600 is the loan that we have now on that property. And our payments about $1,200, $1,220 a month. Now, over the life of that loan, we're going to pay total interest of $149,950, about $150,000.

So that's a really it seems like a really big number, but it's significantly less than the value of the home. And that value of the home should appreciate over time. So if we could rewind the clock back during those low interest rate environment periods, the advice would be to go out, get the largest mortgage you can possibly get, and get the lowest rate you can possibly get, and hold on to that thing because price values appreciating those interest rates were so low.

Now fast forward to today. Now, today we want to go out and buy that same home. The average home price in the country today is now $419,200. So now it's $420,000. Now our 20% down payment is going to be more. That 20% down payment is now $83,840. The average 30 year mortgage is 6.76%. Maybe it's higher than lower than that, depending on your credit, how much money you put down, what kind of market you're in.

But we're just talking big picture here. You can again run these numbers for yourself in your own market, with your own numbers and what you have access to. And now the loan is $335,360. So a significantly larger loan instead of about 289,000. Now it's 335. I think what's really going to stand out is the payment, though. Now that payment is over $2,000, almost $2,200, $2177 per month.

We're not accounting for taxes and insurance either, but that's outside of this equation for the purposes of what we're running right now. You can factor that in later and in some subsequent videos I'm going to talk through, including some some other maintenance figures and other things that that need to be considered when you're looking at owning a home versus renting and things such as that.

Now, what is the total interest that you pay? That's the big number, almost $450,000 in interest. That's more than the value of the home. Now the home is going to appreciate. Then you're going to overcome that. But it doesn't feel very good. And the value of the mortgage that you have today, let's say that you're in retirement. You're thinking about swapping these homes out.

Well, you're going to pay $150,000 in interest over the rest of the term of your mortgage. You get a new mortgage. Now you're paying 450,000 over the same term. So the value of that mortgage is the difference between the 448 and the 149, about $300,000. That mortgage is worth $298,000. Now, if you're in retirement, maybe you're not thinking about relocating or replacing your mortgage with another mortgage.

Maybe you don't have to do that. You're just looking at paying off the mortgage. Should I pay off the mortgage altogether? Well, this is typically more of an investment discussion then. And that is the difference in the total interest you're going to pay over the term of that loan versus if you took that money and invested it, what's the total interest that you would have earned?

And you may look at that number and say, eh, over 30 years, it's $100,000. Maybe that's not a big deal to you. Maybe it's a half $1 million and you say, well, this is a really big deal. You need to value that for yourself. How much is that difference worth? If you're in retirement, I would argue you're not in the accumulation stage anymore.

Most often in retirement, we should start doing what feels good to us. We've earned the right. Why did you accumulate the dollars? So that you can feel good, so that you could sleep better at night, because you wanted your happiness level to be higher and maybe that's what you're going to overweight at this stage in your life is, is you're just going to go ahead and you say, yeah, I'd have more money, would be a better financial decision if I kept the mortgage and invested the difference.

But what are you here for and what is going to bring you the highest degree of happiness in retirement? I think that we've earned the right when we get to financial freedom, to make some decisions that may not make financial sense. And for instance, I have a lot of families that want to spend winters in the South. They want to spend winters in Arizona or Florida, and they go "Casey, should we just buy a rental?"

If we buy a rental, then we can stay there. We're still going to benefit from appreciations. Rent. It's a better financial deal if we run the numbers and we buy a rental property instead of renting for 2 or 3 months in the winter. And see, yeah, you might be right, but is it worth it? What's it matter? If you end up putting some more money in your pocket at this stage in the game,

how is that going to change your life? And they say, well, it's really not. Yeah, maintenance issues to take care of? That might actually impact your life negatively. And so make sure you're valuing the right things. Now when we start talking about what should we value? I think there's really three key things for you to value when you're making this decision.

And the first one is flexibility. If you value flexibility among all other things, then it may make sense not to pay off that mortgage or not to tie off the home equity. You might say, well Casey I could get a HELOC if I want to. I get a home equity line of credit. And so access to cash if I want to.

That may be true. But when you do that, it's probably going to be at a substantially higher rate. So if you value flexibility I say don't pay it off. Now, if you value debt freedom, you say you know, I value being debt free way more that I value flexibility. Then go ahead and pay that off. Now, if you value accumulation and you're still trying to accumulate and you want to leave a bigger legacy and that's more of your focus, then I think it just comes down to the rate.

If you have a high rate, then you go ahead and pay it off. If you have a low rate, then you're going to go ahead and retain that asset. And so this is the consideration for you. And I want you to walk through that. Do the math for yourself. And keep in mind these three key things. Now if you want some help running those numbers then I encourage you to call the number on your screen.

You can schedule a personal finance review with one of our financial advisors at no cost, and we'll run the numbers for you and help you make the very best decision you can for your retirement.