From Kiplinger’s: 5 Steps Before Paying Off Your Mortgage Early

April 23, 2013

I received an email from Kiplinger’s with these five steps to take before paying off your mortgage early during retirement:

• Pay off consumer debt—given today’s interest rates, you’re probably paying less than 5% on your mortgage, compared with about 13% on credit card balances. Paying credit card debt give you an instant return on your money equal to the rate on your cards—and you can continue to deduct the interest on your mortgage (no such tax break for credit card balances).

• Fuel retirement accounts—the remaining few years before retirement represent your last chance to stash money in tax-advantaged retirement accounts. You’ll waste that opportunity by not maxing out your accounts. An even worse idea is withdrawing money from your IRA to pay off the mortgage.

• Keep a reserve fund—even if you don’t plan to touch retirement savings to pay off the mortgage, be sure to have enough money in your emergency fund to cover six months of living costs; otherwise, you could end up tapping retirement accounts anyway. Also, be mindful you’ll need income in retirement to cover other expenses.

• Weigh return versus risk—if you’re paying 4% on your mortgage and you have nonretirement cash accounts earning less than 1%, retire the mortgage. But, if you think you can earn 6% on your investments and your mortgage costs 4%, keep the mortgage and let your investments grow—assuming you won’t kick yourself if your investment return takes a dive.

• Stay flexible—you could refinance a shorter-term mortgage, saving thousands of dollars in interest. The downside: you would incur closing costs and could also lock yourself into a higher monthly payment, depending on your current interest rate. Consider prepaying your current mortgage each month instead.

You can read the entire article here.

I have always felt that the decision of whether or not a person should pay off their mortgage should be a function of interest rates. The higher the interest rate, the faster it should be paid off. When I can get a mortgage at under 4% and I have no trouble making the payments, it makes little sense to me to worry about paying off my mortgage quickly. Yes, there are benefits other than financial to paying off a mortgage early. Peace of mind is one of them—especially during retirement. I understand that. I guess a person must decide what’s most important to them.

2 responses to From Kiplinger’s: 5 Steps Before Paying Off Your Mortgage Early

  1. It is a balance — ideally you want to have your emergency fund, no credit card debt, funding retirement accounts, and also paying off a mortgage on a 10-15 year schedule.

    Unfortunately, most people can’t do all the above, so it boils down to choices — eliminating outstanding credit card debt should be the #1 priority, followed immediately by having a sufficient emergency fund.

    The decision between paying off a mortgage (early), vs funding retirement accounts is a toss up to me — it really doesn’t matter as long as spare/excess cash is being put into one or the other (or both). If you have employer 401-k matching, then pick that option over mortgage prepayment, then do whatever helps you sleep better at night.

  2. You are right, paying off the mortgage does provide peace of mind in retirement.