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The Benefits of Paying Down a Mortgage Before Retirement

Christine Benz

Christine Benz: Hi, I'm Christine Benz for Morningstar.com. Should you pay off your mortgage prior to retirement? Joining me to discuss that question is Ilyce Glink. She is CEO of Best Money Moves, and she is also author of a new book, 100 Questions Every First-Time Home Buyer Should Ask.

Ilyce, thank you so much for being here.

Ilyce Glink: It's a joy. Happy to do it.

Benz: Ilyce, a lot of pre-retirees look at whether they should pay off their mortgage versus continuing to plow more into their retirement accounts, and I want to talk about that. What are the key benefits--aside from the psychological one of maybe being debt-free--of paying down a mortgage prior to retirement?

Glink: The first question is, what kind of cash are you going to have after you retire. Some people don't really retire. They just go from full-time jobs to sort of part-time income or they start up something in their garage, but they are still making some money coming in. Your first question is, are you even going to have a loss of cash flow? Is that going to go down? And if it is, OK, now, let's talk about paying off your expenses and what expenses can you get rid of before you hit retirement? What new expenses will you have coming into retirement? Some of those might be an increase in healthcare benefits. 

If you are trading off, let's say, mortgage debt, but you are going to have an equal amount of healthcare cost, but the income is going to roughly stay the same, you are probably in good shape. But if you aren't going to be in good shape or you think that you might need to reduce somewhere else, getting rid of that mortgage debt is a nice way to go.

Benz: Let's talk about the new tax laws, because that's in the mix where many fewer people will be itemizing their deductions very likely than in the past. Let's talk about how tax law changes might in fact embellish the case for prepaying or paying off the mortgage altogether prior to retirement.

Glink: Under the new tax law everybody is limited to the amount that you can write off. And we talk a lot about the SALT deductions, state and local taxes. When you look at what you pay in a state that is a higher-tax state--New Jersey or New York, Illinois, California--you are well over the threshold that's now been set to be able to write these things off. And so, for many people, they are looking at their mortgages and they are thinking, we used to be thinking that that write-off was going to help us finance a much larger mortgage and so, we'll just get a really big mortgage. It doesn't matter how much interest rate, you know, what we are paying. But now, it does matter. It's all limited.

When people are thinking against about paying down their mortgages, I'm a big fan of prepaying mortgages. For the investment properties I have, we've continued to throw the excess cash at those mortgages and paid them down. For our own home loan as well, every time we refinanced, we left the payment the same even though the interest rate went down, and we've been prepaying as well. We want to be done. To your point, there's just this great psychological benefit to being done, but there are also some real world consequences to not being done in an era where deductibility is so severely limited.

Benz: The interest deductibility may be less beneficial to people, too, especially if they are later in their mortgages, with the new tax laws, but also the interest is just a less of an amount of their payment, right?

Glink: It is. You know, as you are paying off your mortgage, everything is amortized. The first month of your mortgage payment, you are paying the most interest you are ever going to pay on that payment. And the last interest payment, you are paying almost nothing. There's this really nice cross paths, you pay less in interest as you go along. Your deductions would be less anyway. Well, your taxes are going up, so there is more of there, but overall, when you look at interest you pay, you are paying down, it's a declining liability.

You want to think very carefully about what you are writing off, what you are paying down. And again, going back to that real question, which is, how much income are you going to have in retirement and what do you want to do with that income. If it were me, I would really not want to be paying my mortgage.

Benz: Some people might say, they might look back on their investment returns like over the past decade and say, well, I've easily out-earned that mortgage rate with my investment portfolio. What's your response to that way of thinking? Is that a good comparison, what my long-term investment portfolio has earned versus what my mortgage interest rate is?

Glink: The last 10 years have been just a remarkable time. We have seen mortgage interest rates fall to 45-year lows. We've seen the stock market triple since--well, more than triple--since 2009. If you were lucky and you bought on March 9, 2009, all the more power to you. Here we are today in the mid-20,000 mark. So, the real question is not that did you make money by paying just the interest only and investing the rest; if you didn't make money, there's a problem.

The question is, what happens going forward. We are seeing a lot of instability now in the stock market. There's a lot of reaction to tariffs. There's lots of news about tariffs. There's news about everything these days. The market is wobbling along. A lot of people feel like we are way overdue for a recession. What is your portfolio going to look like if we have another recession? Maybe it won't be as bad as 2009, but it could be serious enough where you will be very happy not to have the extra expense of a mortgage on top of everything else.

Benz: And the mortgage paydown is sort of a guaranteed return versus whatever my long-term investment assets might do?

Glink: Absolutely. I mean, my mortgage, I think, is about, let's say, 3%. When I prepay my loan, every single dollar I prepay earns 3%, which is great. It's 3% though. We are not talking about 11%, which is where it was back in the '80s. You have to look at sort of what returns you are going to be able to have. And it is important to look at where CDs are and have a balanced portfolio. But you know, a little sure thing, that's nice too.

Benz: How does my intent for my home, whether I intend to stay in it or not stay in it, does that factor into whether I prepay or whether I just kind of pay the minimum that my lender requires?

Glink: Prepaying your mortgage gives you options. A lot of people opted for--interest rates were this low--they opted for 15-year mortgages. They were paying under 3% for those. Some people even got 2.5% on a 10-year loan. Those people are nearly almost done paying off those mortgages anyway. And if you had a 15-year mortgage that you got in 2009 or 2010, you are well into--you almost have no interest left anyway. You have to think about where you are and again, where you want to be, where you want to be going and how all of the income that is coming in now, how that's going to factor into where you parcel out your retirement dollars. I'd be very cautious about thinking about it.

Benz: How about people who are under water in their mortgages, where they bought in at an inopportune time, maybe they bought in the mid '00s, what do you say to them in terms of the prepayment and the wisdom of prepayment?

Glink: Pay down your mortgage as fast as possible. There are still a huge number of people who are under water. Some estimates are as many as 10% of mortgages are still under water. And by that they mean functionally under water as well. 

Benz: Well, define that if you would.

Glink: Sure. Under water is when you owe more than your house is worth. Functionally under water means that your mortgage amount and the amount you could sell are probably the same but after closing costs and things like paying the commission to the agent, you are under water, you will have to bring a check to the closing. 

In Chicago, for example, the city just has a huge number of--I won't even call them foreclosures anymore--but the under water homeowner areas of the city that have just not recovered. And even in the North Shore, the gilded North Shore, right, some of the fanciest ZIP codes in the country, properties there are selling for what they were selling for 15 and 20 years ago. That is well before the '00s. Now, you are looking at the mid-'90s. 

Property prices around the country while you keep hearing that they are going up and up, the truth is in every single market there are areas where people are not seeing that kind of price appreciation. The message to all of them is, pay down your mortgage as fast as possible because once you are no longer under water or functionally under water, you can sell your property, have more options and opportunities available to you, and not have to come with a check to the closing.

Benz: Ilyce, it's always great to hear your insights. Thank you so much for being here.

Glink: It's a pleasure.

Benz: Thanks for watching. I'm Christine Benz for Morningstar.com.