Many individuals have a strong picture of what they want their retirement to look like, and in many cases that picture includes not having to make a mortgage payment each month. Owning your own home without any outstanding mortgage can provide a great boost to your personal budget by freeing up a significant amount of cash each month.
But the money to pay off your mortgage early has to come from somewhere, and for most people that generally means investing less or saving for retirement.
Here is some retirement advice on whether it is better to pay off your mortgage early, or to try to save more money for retirement.
Considering the Basic Trade-Off. Repaying your mortgage early is certainly a positive financial achievement, but if doing so comes at the expense of saving less for retirement then you need to consider both the downside of doing so.
Your Mortgage Interest Rate. One significant factor in making your decision should be the current interest rate of your mortgage. If you have a low rate on a long-term fixed mortgage, then your cost of borrowing may actually be quite low. If you are able to get a higher rate of return on the investments you make towards retirement, then you may be better off saving instead of paying off your mortgage early.
Deductible Retirement Contributions. Keep in mind that you may be eligible for tax deductions based on your retirement contributions, and this further boosts your effective rate of retirement savings. As a general rule, one of your highest financial priorities should be making sure you make the maximum deductible contributions to your retirement accounts each and every year.
Will Prepayment Cost You Additional Fees? It’s not a common term, but some mortgage agreements only allow borrowers to prepay their mortgages only with a prepayment penalty. This prepayment penalty can be calculated in a number of different ways, including as a percentage of your outstanding balance when you prepay, or perhaps as a number of months worth of interest.
Prepayment May Result in Less Asset Diversity. If you prepay your mortgage then you risk having too much of your overall wealth tied up into a single asset. Consider it this way, if you choose to build up your retirement savings accounts instead of paying off your mortgage early, then you’ll have a source of liquid assets (albeit with a potential early withdrawal penalty) that you have immediately available in case of an emergency. But it’s much more difficult to get that liquidity from a paid off home.
Of course, reducing your retirement savings rate in order to pay down your mortgage early isn’t the only option. If you’re already contributed the maximum amounts to all of your retirement accounts each year, and can cut back on your spending in order to free up additional cash to pay off your mortgage early, then you’ll have the best of both worlds.
Tags: paying down mortgage, retirement advice, retirement planning
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on Monday, June 23rd, 2014 at 2:16 pm and is filed under Planning.
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Many individuals have a strong picture of what they want their retirement to look like, and in many cases that picture includes not having to make a mortgage payment each month. Owning your own home without any outstanding mortgage can provide a great boost to your personal budget by freeing up a significant amount of cash each month.
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