During times of economic instability and employment uncertainty, many people wonder if they should pay off their mortgage, especially as they get closer to retirement.
One rule of thumb used to be (all rules of thumb seem to be under scrutiny these days) that if you could get a better real rate of return in the stock market, it might be worth paying off your home's debt and deploying the extra money in the market. But with so much volatility in the market, that's a scary prospect for the risk-averse, or for those with a short time horizon.
Since the recession, the stock market has recovered much more quickly than housing, which looks like it still has a long way to go before regaining prerecession home values. But putting your mortgage payment into the market means your investment could go down. If that's beyond your risk tolerance, compare the returns of safer, fixed-income investments instead.
Here are a few additional questions to ask before signing off on a mortgage payment:
What other debt do you have? Not all debt is created equal. Before you pay off a mortgage, make sure your expensive, high-interest debts, like credit-card balances are paid off first. Because you get the tax deduction, the mortgage should probably be the last debt you pay off.
How far are you from retirement and do you have plenty of retirement assets? For many, heading into retirement debt-free is psychologically as well as financially freeing. While it makes sense to pay off high-interest debt, your next step should be to make sure you have six months of living expenses and a well-funded retirement nest egg.
Do you want your home to produce income in retirement? At age 62, you might be eligible for a reverse mortgage, which pays you a set amount while you continue to live in the home. The more equity you have in your home, the higher the payout.
Use this mortgage payoff calculator to find out how quickly you could own your home free and clear.
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