If you were fortunate enough to take out a mortgage when you were in your early 20s or 30s, then you probably have already paid it off just before retirement. However, many people are not on a straight line when it comes to paying off their homes. They have refinanced along the way or took out a second mortgage.
In more recent years, it is more common for people to put off major life events such as purchasing a home or starting a family. Whether it be due to student debt or other reasons, this is creating and will continue to create more people going into retirement with outstanding mortgage balances—but that isn’t necessarily a cut and dry bad thing. Let’s take a look at some of the advantages as well as disadvantages of going into retirement with a mortgage.
Tax Benefits of Maintaining a Mortgage
Depending on the area you live in, it may be more beneficial from a tax standpoint to keep your mortgage. What it comes down to is the value of the home. If you live in a low-cost area such as the Mid-West according to Investopedia, the tax benefit is often not worth it. However, if you live in areas live in areas like San Francisco or San Diego where home prices are high, then it could be a good strategy for you to use.
Using It to Increase Your Net Worth Growth
The basic concept as outlined by the article “Burdening Your Retirement with a Mortgage,” is that you can’t “eat your home.” In other words, your home doesn’t produce an income for you. Moreover, home equity is really not useful to you unless you borrow against it. As such, an option that is available to you is to take out a mortgage and invest the money in a diversified portfolio. The desired result is that it should “outperform the after-tax cost of the mortgage, thereby enhancing your net worth.” However, taking out another mortgage makes your financial life a little more complicated, and income from the investment will fluctuate, which may be too risky for some.
Rent Can Be Less Predictable Than a Mortgage
Many make plans to sell their home when they retire, but keeping your home, even if you have a mortgage, could be better than going from rental to rental. The reasoning behind this is that your landlord can choose to raise your rent when your current lease agreement comes to an end whereas your fix-rate mortgage stays the same according to Wise Bread.
Paying Off Debt with The Highest Interest Rate First
Typically, your mortgage interest rate is lower than your other debts such as a credit card or your car. If you do head into retirement with a mortgage, you should not stress about paying the house off first. What you want to do is take care of the debt with the highest interest rates. Once you get out from underneath those debts, then you can assess whether or not it will be worth it to pay off your mortgage.