Is Retiring with a Mortgage a Smart Decision?

I’ve always dreamed of owning my own home, and, in 2018, that dream became a reality. But I’ve also always just assumed I’d get a chance to travel the world and explore new places and cultures—especially, after studying Anthropology in college. When you own a home you feel a sense of security but also a weight of responsibility. As a renter, your living situation typically has a year-long expiration date and then you’re free to move or travel near, far, wherever your heart desires!

When I think about achieving financial independence or early retirement, I picture adventures across the globe, but I also do picture myself thoroughly enjoying my time in the comforts of the house I’ve nurtured into a home. What I don’t picture is having to wait the 28 years that remain on my 30 year fixed rate mortgage to do these things.

It seems like most homeowners do everything they can to pay off their mortgage before retirement. At least in traditional retirement terms. When it comes to early retirement, there’s a lot more to consider based on the tighter timelines and higher stakes savings. Retiring early requires you to keep a finger on the pulse of your financial health and establish a plan so you’re prepared and able to live comfortably when it comes time to exit the workforce.

As with most financial decisions, your best course of action will depend on your personal situation and what you’d like to achieve. If you’re debating between paying off your mortgage, doing a cash-out refinance, or retiring with your existing mortgage, here are a few things to keep in mind:

Paying Off Your Mortgage

In an ideal FIRE situation, you wouldn’t have to use much, if any, of your income or savings to cover the roof over your head. Leaving your retirement savings completely untouched is not something all homeowners are able to achieve, and that’s okay! To decide whether or not paying off your mortgage early is financially feasible, you’ll need to take into account your lifestyle, income, mortgage size, and current savings.

If you do have the money to pay off your mortgage before retirement, or at least pay down the principal amount, it just makes sense. You’ll have peace of mind in knowing you’ve paid off such a major monthly expense while also freeing up the equity in your home if you decide to downsize or sell it once you’ve stopped working. If you’re able to pay off your mortgage early, you’ll also have the freedom to put that money toward pursuing other, more fulfilling or exciting ventures.

However, paying off your mortgage wouldn’t make sense if you haven’t put aside very much in your retirement savings yet. Obviously, if early retirement is on your mind, saving/investing your money should be your top priority. In general, it’s best not to take too much from retirement plans, such as an IRA or 401k, or your personal savings, as major withdrawals from these accounts can trigger higher taxes.. A good compromise is to chip away at the principal by paying a partial lump sum each month or making payments in addition to what you already owe each cycle.

Mortgage Refinancing

Right now, we’re considering refinancing our mortgage loan, because interest rates are low and could reduce our monthly payment so we could either save more money each month or pay off our loan sooner—or both!. I could see refinancing being a solid option for someone who is about to early retire and wants to reduce their monthly payments-even if it tacks on a few years to the length of the loan. You might also like this strategy if you plan on keeping your home as a potential rental investment property while you do some traveling in your newfound spare time. In most market, you’ll still be able to charge a higher rental rate than your mortgage payment.

There are two primary refinancing options. The first is a rate/term refinance, which is ideal if you’re looking to lower your interest rate and monthly payments or if you’re interested in changing your loan term. The second is a cash-out refinance, which is ideal for homeowners who want to convert their current home equity into money they can put toward their retirement savings, debt consolidation, home improvements, or other large purchases.

Refinancing into a shorter-term loan may help you pay off your mortgage faster. However, there are costs associated with refinancing that you should consider. Appraisal fees, title insurance changes, and origination fees can all make refinancing a more costly option. You also might be tempted to opt for  a short-term loan with higher monthly payments as a way to pay off your home sooner but delay your FIRE retirement or force early retirees to re-enter the workforce.

Keeping Your Mortgage

Depending on your financial situation, carrying your mortgage into retirement might not be a bad decision. For instance, if your monthly retirement income is high enough to comfortably keep up with your mortgage payments, you may not need to consider refinancing. One pretty compelling reason to keep your mortgage after retirement is the tax savings. You may qualify for additional tax breaks on mortgage interest, freeing up additional cash to invest in stocks or put into your retirement savings.

In order to live comfortably in retirement, you’ll want to ensure you have enough money to support your lifestyle, as well as enough reserve funds for any medical and unplanned expenses. Remember, you shouldn’t dip too deep into your savings, so if you find that you have limited funds, it may make more sense to save your money and continue to pay off your mortgage as usual. Also, if you have other higher outstanding debt, such as car loans or credit card debt, you may want to work on paying those down first, as they typically have higher interest rates.

As with the other two options, there are potential drawbacks to carrying your mortgage loan post-retirement. For starters, it may be difficult for you to keep up on your mortgage payments once you exit the workforce since you’ll likely have a lower income, unless you have a killer passive investment strategy or side hustle. In addition, keeping your mortgage instead of paying it off or refinancing may cost you more in interest in the long-run.

Ultimately,  before deciding whether you’d like to pay off, keep, or refinance your mortgage, you should sit down and do the math on what that will look like monthly and whether you’ll be able to cover the costs in each scenario. Always, always, always take the time to calculate what will get you ahead, financially, in the future.

Did you retire with a mortgage? Why or why not? Let me know in the comments!