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No-Mortgage Goal Not For Every Retiree

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NEW YORK (6/11/13)--Not long ago, people gauged retirement readiness by their mortgage-free status. This stipulation no longer always holds true. In 1989, only 26.4% of householders retired while still carrying a mortgage. In 2007, that number rose to 46.5%, according to the most recent numbers from the Federal Reserve's Survey of Consumer Finances ( May 28).

Paying off a mortgage has pros and cons, and the best decision isn't the same for everyone. If you won't have peace of mind until our mortgage is paid in full, paying it off might be the answer for you. Your living expenses will be cut and you'll have a resource in your home equity.

On the other hand, low interest rates can make continuing to pay a mortgage and investing surplus money elsewhere an attractive option for some. You might see a greater return following this route.

"Paying off a mortgage is advisable only if these four preconditions are met," said Steve Rick, the Credit Union National Association's senior economist.  The pre-conditions are:

  • You've paid off all high-interest rate consumer debt. You're likely paying a much higher interest rate on credit card debt than you are on your mortgage. Put extra money toward credit card debt instead of paying extra on your mortgage to see an instant return. While paying off card debt, you still can deduct mortgage interest if you itemize--there's no tax break on credit card payments.
  • You've built an emergency savings fund equal to six months of living expenses. You probably have no intention of tapping retirement savings to pay off your mortgage, but you could end up doing so if you don't have a significant emergency fund. Also keep in mind that you'll need income in retirement to pay for other expenses. Experts say your best bet is to plan to retire at or as close to your preretirement income as possible. You could end up house-rich and cash-poor if you're not careful.
  • You've maxed out retirement account contributions. If you only have a few years left before retirement, it's your last chance to fund retirement accounts. For 2013, you can contribute $23,000 to a 401(k) and $6,500 to an individual retirement account if you're age 50 or older. If paying extra toward a mortgage to get it paid off by retirement is keeping you from contributing the max, not paying your mortgage off early could be the better choice (Kiplinger May 2012).
  • The after-tax return on available investments is less than the after-tax cost of your mortgage. With interest rates on bonds and share certificates/certificates of deposit (share certificates of deposit) expected to be very low for the next few years, many mortgage holders will meet this precondition, Rick says.
For more information about mortgages, read the Financial Fitness Challenge "Catch the Refi Wave" in the Home & Family Finance Resource Center.