Credit Card Sir’s Perspective: You may be looking forward to starting your life as a retiree free of mortgage debt, but there are a few things to consider first.
Retiring your home loan makes sense if your stomach churns at the idea of making payments into old age, or you aren’t confident that you can get a return on your money that beats your mortgage rate. But moving heaven and earth to write that last check may not be the best use of your resources. Before you decide, follow these five steps.
— Pay off consumer debt. Given today’s interest rates, you’re probably paying less than 5 percent on your mortgage, compared with, say, 13 percent on credit card balances. Paying credit card debt gives you an instant return on your money equal to the rate on your cards — and you can continue to deduct the interest on your mortgage.
— Fuel retirement accounts. The remaining few years before retirement represent your last chance to stash money in tax-advantaged retirement accounts. You’ll waste that opportunity by not maxing out your accounts. In 2013, you can sock away $23,000 in a 401(k) and $6,500 in an IRA if you’re 50 or older.
An even worse idea is withdrawing money from your IRA to pay off the mortgage. With a traditional IRA, you’ll owe tax on the distribution, plus a 10-percent penalty if you make a withdrawal before your 59 1/2.
— Keep a reserve fund. Even if you don’t plan to touch retirement savings to pay off the mortgage, be sure to have enough in your emergency fund to cover six months of living costs; otherwise, you could end up tapping retirement accounts anyway.
Also, be mindful that you’ll need income in retirement to cover other expenses. Draining investments to pay off the mortgage could leave you house-rich and cash-poor.
Weigh return versus risk. If you’re paying 4 percent on your mortgage and you have nonretirement cash accounts earning less than 1 percent, retire the mortgage. But if you think you can earn, say, 6 percent on your investments and your mortgage costs 4 percent, keep the mortgage and let your investments grow — assuming you won’t kick yourself if your investment return takes a dive.
Stay flexible. You could refinance to a shorter-term mortgage, saving thousands of dollars in interest. The downside: You would incur closing costs and could also lock yourself into a higher monthly payment, depending on your current interest rate.
Consider prepaying your current mortgage each month instead. And if your finances hit a rough patch, you can revert to the lower payment.