A few years ago, my friend Tom called me on a Sunday morning. He simply asked for advice from two different financial advisors and got two completely different answers.
“Stacy, I’m 59. I have $180,000 left on a mortgage at 3.1%. I also have $300,000 in the money market paying more than 4%. One guy tells me to pay it off, sleep better, and take a day off. Another says I’d be crazy to pay cheap money when my cash is earning more. Who’s right?”
Honest answer? They both were. They were just answering different questions.
It’s one of the great financial debates, and it splits advisors right down the middle. Mathematics leans to one side. Quality of life and cash flow logic depend on each other. Most articles you read on this topic pick a side and ignore half the compromise. I’m not going to do that.
What’s interesting is how much this matters to Boomers and Gen according to Marketplace reporting on Harvard University’s Joint Center for Housing Studies data.Over the past three decades, the share of homeowners ages 65 to 79 with a mortgage has increased from 24% to 41%. The mortgage burning party is largely a thing of the past.
Here are five questions that really get down to it.
1. What is your interest rate?
It’s the single biggest variable, and it’s not even close.
If you locked into a 3% mortgage in 2020 or 2021, you’re sitting on the cheapest loan ever. Pay it and you leave that gift.
Meanwhile, ultra-safe Treasury bills and high-yield savings accounts have been paying 4% or more recently.
The math is brutal: Paying off a 3% mortgage with 4% cash earnings is equivalent to taking a guaranteed 1% loss on every dollar.
Now turn it over. If you’ve got a 7% or 8% mortgage on a recent purchase, the math reverses. Paying this is like getting a guaranteed 7% or 8% return. Almost nothing gives you that.
Bottom line: less than 4%, the math says keep it. Over 6%, the math says kill it. In between, it’s close enough that other factors must decide.
2. Where will the more money go?
If you want to take cash out of a 401(k) or IRA to pay off the mortgage, stop right there. Withdrawals from a tax-deferred account are subject to ordinary income taxes, and a large withdrawal could push you into a higher bracket and even mess with Medicare premiums.
It’s rarely worth it. If you’re determined to pay off the mortgage, do it from after-tax savings, or make an extra payment every month from your paycheck.
3. What will your cash flow be like in retirement?
This is where the math people fail me a bit. The mortgage payment is not just a financial transaction – it is a recurring obligation that has to be funded every month for the remaining loan.
If your retirement income from Social Security, pensions and a 4% portfolio withdrawal comfortably covers the mortgage and your other living expenses, fine. Take a loan.
But if your retirement income is tight, eliminating the largest fixed expense in your budget changes everything. A sudden market drop is not a crisis – you can spend less because you owe less. Some retirees say paying off their mortgage is the best psychological move they ever made.
As for the other side of this coin, there are arguments for maintaining your mortgage in retirement, especially when interest rates and tax considerations are cut in favor of maintaining the loan.
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4. Would you really tax taxes now?
For decades, the mortgage interest deduction was the killer argument for keeping a mortgage. This changed in 2017. The standard deduction nearly doubled, and most retirees are now not itemized at all.
If you’re taking the standard deduction, your mortgage interest is zeroing out your taxes.
This used to be a reason for mortgages. For most retirees, this is no longer the case.
5. How does it affect your sleep?
I am very serious about this question. Some people actually don’t lose a minute of sleep over mortgages. Others wake up at 3 a.m. thinking about it.
If you’re in the second group, the spreadsheet doesn’t matter. pay it off. Peace of mind is more valuable than rate arbitration. I’ve never met anyone who has paid off their house and regretted it, and that includes me. Besides passing the CPA exam, winning Emmys, and marrying Sarah, this was the highlight of my life.
The numbers also tell a sobering story about why this matters. AARPCiting a survey by national mortgage banker American Financing, it reported that 44% of Americans between the ages of 60 and 70 have a mortgage when they retire, and 17% of those surveyed say they may never pay it off. C
Paying off mortgage debt by retirement is becoming the norm, not the exception.
The middle ground step no one talks about: Don’t pay in full, but pay extra. Paying off the loan an extra $200 or $500 per month instead of principal can take several years, build equity faster, and allow you to put most of your liquid savings to work for you. You don’t have to choose between two extremes.
By the way, Tom kept his 3.1% mortgage and put the cash where he could earn more. But he also told me that he would probably pay it off the day the interest rate on his savings became lower than his mortgage rate. Intelligent. He let the math take over – until his conscience needed to take over.