Pay off the mortgage before retirement?

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Question posed by a homeowner nearing retirement: 

Should we pay off our mortgage early if we can afford it?

The answer, from NJMoneyHelp.com is not simple. There are some pros and several cons about it.

Q. I am 60 and my wife 56. We plan to move in four or five years. At that time, I will retire and our adjusted gross income will drop by 60 percent. We plan to buy a home without a mortgage. We currently earn $200,000, and our 15-year mortgage is about $250,000 with a 2.99 percent rate. We paid $7,000 in interest last year. The mortgage would be paid off in 2030. Based on an accelerated payment of $1,000 per month, we’d have the mortgage paid off in 2025 with an interest savings of $30,000. In all, we’d pay $60000 more to save $30,000 in interest. Is it worth it? — Almost retired

A. Paying off a mortgage isn’t always a slam dunk.

It might seem to provide peace of mind and be a no-brainer if you can afford it, but there’s more to consider, said Ken Van Leeuwen, a certified financial planner with Van Leeuwen & Company in Princeton.

Pre-paying the mortgage would eliminate five years of tax deductions of mortgage interest, he said.

The tax deductions could be helpful for offsetting some income tax burden if you take money from your 401(k) and other qualified retirement accounts when you retire.

You should also consider any additional debt that you are currently carrying.

“With an interest rate of 2.99 percent, you may want to consider paying down other debts that have less favorable rates such as credit cards,” he said.

And as you get closer to retirement, if you aren’t already, you should consider maxing out your retirement accounts to take full advantage of any employer matching contributions and additional tax deductions, he said.

In looking at the purchase of your new home, for some clients, Van Leeuwen said, he has recommended taking a partial mortgage because it presents some advantages.

“Assuming you can afford the mortgage payments out of retirement cash flow, taking a partial mortgage allows you to fund the purchase of your home at a relatively low interest rate,” he said. “In doing so, you free up additional capital which can be used in a more beneficial way.”

He said putting a large amount of capital into a new home, potentially limits opportunities for future growth because you are tying up a large portion of funds into a “non-working asset.”

“Instead of using the sales proceeds from your current home to fund the purchase of your new home, consider investing these funds,” he said. “While it is certainly not guaranteed, we have seen that historically, over long periods time investments in a diversified portfolio can provide growth that outpaces mortgage interest while still allowing you to deduct your mortgage interest.”

Email your questions to Ask@NJMoneyHelp.com.

This story was originally published on Sept. 18, 2019.

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