How nice would it be to not have a mortgage payment in the world as you near retirement? Some think about this and believe that it is always the right way to go, but there is a little more debate about the topic than you might at first suspect. You see, there are at least some who say that you should first consider your particular financial situation and what is right for you from a tax perspective as well before making those payments.
First, let us consider what is good about paying off the house before you hit those Golden Years. Obviously, without that payment coming out every month you have more cash flow coming into your bank account. You probably also have less stress about how to come up with the money you need each month. It can feel like a giant weight has been taken off of your shoulders, and that can be a nice way to enjoy your later years.
A lot of people point to the returns that one can expect to get in the stock market in comparison to what they pay in interest on a mortgage and see it as no competition. Why pay more on the home that only costs 3% roughly per year when you could instead earn 8 or even 10% in the stock market with that same money? That is the argument, but of course, it does not always pan out that way. Paying on the house is a guaranteed return on investment so to speak while playing around in the stock market might not work out. For all the planning that you do, the market can still have a bad year or even a bad run of years and leave you worse off.
Now, while all of this is a very positive case for planning to pay off the house before retirement, it is not the whole story. There are potential pitfalls to doing this which may lead you to think twice about it.
If your financial situation changes at any point while you are paying off your mortgage you could end up in very bad shape. Say you have paid the majority of your house off but are then hit with an injury and inability to work. Suddenly, you are unable to make the payments that you were making before, and then the bank comes to take away the whole house. Then you would have flushed a huge amount of money down the toilet that could have been invested and saved instead.
If interest rates change you could get a better return just putting your money in the bank and letting the interest help it grow. It is not the case today, but considering that most people have 30-year mortgages, we just don’t know where interest rates will go in that period of time. You might be better off just saving the money and letting it grow rather than paying down on a home loan that does not have a very high-interest rate.
Finally, playing it safe and paying on the home when you have a long time horizon may not make sense for you. Is paying on a house the whole time cheating yourself out of potential growth on your money? The earlier you can start on a strategic plan, the better.