A study conducted by the Center for Retirement Research at Boston College concluded that “retired households are, in theory, better off repaying their mortgage.” Does that mean you should go cash in your investments to pay off your mortgage now? It depends, of course, on your individual situation. You need to factor in risk and taxes before making a decision to pay off your mortgage early. Below are resources to help you make a smart decision.
Paying off your mortgage is a guaranteed return. If you have the financial assets to pay off your mortgage early, but choose not to do so, you are in effect choosing to invest with borrowed money. This would make sense if, after considering risk and taxes, the rate of return on your invested assets exceeds the interest cost of your mortgage. For most people, this is not the case. Learn more here.
In general, the higher your tax bracket, the greater the potential benefit of a mortgage. Once retired, your tax bracket is likely to be lower. Before deciding to pay off your mortgage early, consider the tax impact of your mortgage both before and after retirement. It may make sense to pay off your mortgage just after you retire, rather than before.
To determine if you should invest or pay off your mortgage, you need to compare the after-tax return on your investments with the after-tax cost of your mortgage. This example walks you through this calculation step-by-step.
This U.S. News & World Report article covers all the relevant factors to consider when deciding if you should pay off your mortgage; items such as taxes, interest rates and liquidity. The article also walks through a great case study where this particular couple found middle ground by choosing to downsize.