Life is good — you have a little extra cash on hand, and oh-so-many possibilities exist for making that money work for you. You might invest it, save it or even pay off your mortgage early. Whether you should do the latter, though, depends on your personal circumstances.
Looking Ahead Toward Retirement
Paying off your mortgage early can be a good idea if you anticipate you’ll be living off Social Security benefits and IRA or 401(k) savings after you retire. If you’re living on a fixed income, eliminating those monthly mortgage payments makes your golden years easier financially. Carrying a mortgage later in life can mean dipping more heavily into retirement savings to make ends meet.
It could also mean paying more in taxes. Add half of your expected Social Security benefits to other anticipated sources of retirement income. If the total exceeds $32,000 annually for a married couple filing jointly, or $25,000 for individuals, your Social Security benefits are taxable. If pulling income from your retirement savings to make mortgage payments put you over that applicable threshold, you’ll incur a tax liability you might not otherwise have.
And, putting extra money toward your mortgage to pay it off early instead of contributing to retirement savings isn’t a good idea, either — particularly if it means losing out on your employer’s matching contributions.
Homeowners’ Tax Deductions
Tax bills may not concern you too much because you plan on deducting your mortgage interest and property taxes as long as you keep paying your mortgage. Although these deductions can be significant if you’re financing a pricey piece of real estate, they don’t always amount to a lot of savings on most homes. You also have to itemize your deductions to claim these expenses; claiming the standard deduction often provides you with greater tax savings.
A reverse mortgage allows you to convert the equity in your home to cash, which can provide a financial safety net when you grow older. With a reverse mortgage, the finance company pays you either a lump sum or monthly installments. You must have sufficient equity in your home to qualify, and if you have only a small balance remaining on your existing mortgage, a portion of the amount you take out against your equity must first go to satisfying that balance.
If you’ve already paid off your mortgage, you’ll get to keep more of a reverse mortgage. Putting extra cash into your mortgage over the years is a type of forced savings plan – you can access this equity later (if and when you need it) through a reverse mortgage.
The greatest advantage to paying off your mortgage early may have little to do with dollars and cents. It’s an emotional thing – living mortgage-free, either now or in retirement, takes a huge weight off most homeowners’ shoulders. If you plan on spending the rest of your life in your house, retiring the mortgage ahead of time offers priceless peace of mind.