Once a month I will be answering a question from my readers. Please submit your question to me by e-mail at fern@wholeheartedway.com. I will pick one each month to answer.
Question – I have a small mortgage left on my home. Should I pay it off when I retire in 5 years?
- Daniel B.Answer – That depends on a few factors. If you are still able to write off the interest on the loan then I would recommend that you keep the mortgage because you still get the tax advantage of the interest deduction.
If you don’t have enough interest deductions to itemize on your taxes then you pay off the balance if you have the money to do so and only if those funds are making less than your mortgage interest. For example, if your cash to pay off the mortgage is making 4% and your fixed rate mortgage is 7%, then pay off the balance with the cash.
Even though your mortgage is paid off, it is a good idea to make a monthly payment into cash reserves set aside especially for maintenance on your home. Just because the mortgage is paid off doesn’t mean you can let that large investment sit without repairs.
A common mistake is for retirees to refinance a high interest fixed loan for a lower interest fixed loan. When you refinance, the interest and principal is amortized over the life of the loan and in the beginning you will be paying mainly interest. But if you had your loan for over half of its life, then you are paying down principal not interest which is a good place to be.
Coaching Question – Will you keep a mortgage or pay it off at retirement and why?
