To pay off or not to pay off your mortgage loan when on the verge of retirement can be mystifying dilemma.
Making end-of-career decisions is challenging, but adding a mortgage loan ready to expire can generate a significant dose of confusion for even the most financially adept consumer.
On the one hand, you want the peace of mind brought by reducing your financial liabilities as you move to a period of reduced income. On the other, you don't want to blow a chunk of money on paying off your mortgage and leave yourself in a precarious position during a period of reduced income.
All things considered, it's generally best to go ahead and pay off the mortgage, says Tim Moran, a financial planner and managing partner of Moran and Company in Rochester, Mich.
“That being said, we won’t instruct them to pay it off if they don’t have liquidity or emergency money," he said.
Though whether or not you have that financial cushion can make or break the decision for you, there are a few more elements to wrap into your consideration.What To Consider If You Pay off the Mortgage
Not carrying a mortgage sounds like a dream come true to many borrowers, but just because you aren’t writing a check to your lender each month doesn’t mean all financial property obligations end.
Kevin Driscoll, vice president of advisory services at Vienna, Va.-based Navy Federal Financial Group (NFFG) says although your mortgage payment may fade away, your tax and insurance bill isn’t going anywhere.
“Some homeowners forget that no mortgage doesn’t mean no payments,” Driscoll says. “Unfortunately, you are still going to get a tax bill for that property and maintaining sufficient funds is something every homeowner should consider long before that mortgage is paid off.”
He says the same efforts will need to be made for insurance and homeowner association fees. “Although you are free of two-thirds of that monthly payment, you will still need that remaining third," Driscoll says. "Establishing a safe and stable account to maintain the funds that will be paid to a municipality, insurance and taxes is vital to maintaining stability.”
Driscoll suggests homeowners investigate safe savings options before the last mortgage payment is made. “Consider an NCUA protected savings or money market account for the funds you plan to set aside for tax, homeowner association and insurance payments," he says. "Never park your funds in anything risky, because you don't want to be surprised if the money you invested is no longer sufficient or available when it comes time to pay the bill.”
Beyond squirreling cash to pay insurance and taxes, Moran says mortgage-free homeowners should consider using the cash that went to pay off the mortgage to pay down other debts. “Often, people will pay off the house and then increase their spending and not save money," Driscoll says. "They may be carrying high interest rate credit cards or other high interest debt that should be paid off first.”
Once you know how you will maintain savings, make a point to contact each payee with regard to how the money will be delivered on an annual or monthly basis. “Your mortgage company is no longer going to escrow the funds so you will need to handle each company on an individual basis," Driscoll says. "For instance, let your insurance company know you are paying off your mortgage and will be handling payments.”
One reason reaching out to the tax appraiser and insurance company is vital is because if your mortgage company is managing your tax or insurance invoice, you don’t want future communications to end up on the mortgage broker’s desk with the possibility that invoice or important letter could fall through the cracks.
“Not only could you miss important communication, missing an invoice could result in late fees if you are missing payments--you don’t want this to occur due to a computer glitch,” Driscoll says.
Another reason homeowners should make an individualized effort to reach out, especially to the insurance agent, is to maintain proper coverage in case of a catastrophic event.
“Make sure your insurance company knows you are no longer carrying a mortgage and that your mortgage company be removed from your policy as a payee,” Driscoll says. “In case something catastrophic happens to your property, your payment will go to you and not get hung up with your previous mortgage company.”
Ultimately, homeowners should obtain a document that states the borrower is relieved of all mortgage obligations. “It puts the period at the end of the sentence,” Driscoll says.
Moran says the same mortgage pay off rule for retirees doesn’t apply to clients who plan to stay on the job.
“Clients who are far away from retirement and are younger, in most cases, we advise them not to pay off mortgages because interest rates are really low,” he says. “Plus they are still building a retirement fund, so we would rather see them build that fund, rather than paying off a low rate mortgage loan.”
Financial goals should always be on the borrower’s forefront, Driscoll adds. “Every single situation is broadly different,” he says. “Advice will differ as you could be working with someone who has refinanced their home several times and is paying a mortgage rate of 4.5% versus someone who may still be paying a rate of 8%; so our advice extends to the borrower’s current financial situation, his or her mortgage rate and future goals.”
Ultimately it all boils down to identifying the goal you’d like to achieve with new money and then targeting your strategy toward that goal.
“If my goal is to put kids through college in two and a half or three years or leave a few dollars for the grandchildren in 15 years, your plan of attack will be different," Driscoll says. "Everything is goal-based, because your money is so important to you." That means there's no one-size-fits-all solution; whether or not to pay off your mortgage needs to be strained through your particular lens and stage of life.
In a recent blog post, Rande Spiegelman, vice president of financial planning at Schwab Center for Financial Research offered a smart strategy for mortgage management. “If your mortgage has no prepayment penalty, an alternative to paying it off entirely before you retire is paying down the principal," Spiegelman said. "You can do this by making an extra principal payment each month or by sending in a partial lump sum.”
The borrower saves in the interest and the loan payoff goes faster while still maintaining liquidity and diversification.