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6 Questions to Ask Before You Pay Off a Mortgage

Planning for retirement means ‘pay off the mortgage’ for many people who want to eliminate expenses as income declines. But before cashing out to pay off your house, ask the following six questions. The answers aren’t as clear-cut as they seem, and it may be best to keep the mortgage going.

  1. Do I need funds from my 401(k) account to pay off the mortgage? If the answer is ‘yes,’ then reconsider. Unless your money is in a Roth IRA, you’ll have to pay taxes on the money you withdraw from a traditional IRA. Such a withdrawal could kick you into a higher tax bracket. The long-term benefit of having money that continues to grow in a retirement account is probably greater than paying off a mortgage.
  2. What kind of interest rate am I paying on my mortgage? If you have a very low rate, then it may be wise to keep the mortgage going. You’ll have a tax deduction for the interest payment, and you can use available money for making investments or catch up contributions to your 401(k) plan. You want to take advantage of higher yields that offer a greater return than the interest you’re paying on your mortgage.
  3. Can I achieve the goal of paying off the mortgage without coming out of pocket for the money right now? Making extra payments each year is a way to accelerate the pay-off without taking a big financial hit all at once. Set a time frame that is realistic for your situation and calculate what it will take to reach the goal.
  4. Do I have other debt that I need to pay off first? Making extra mortgage payments won’t make sense if the money can be used to pay down higher interest debt.
  5. Will paying off the mortgage destroy my liquidity? Everyone needs cash for unforeseen circumstances. If all of your money is tied up in your house, you may not have what you need for unexpected medical expenses or even discretionary expenses that you look forward to in retirement.
  6. Is my decision driven by finance or emotion? This is a tough question to answer, and the truth may be a combination of finance and emotion. For many, the feeling of freedom from a mortgage is worth some sacrifice. Knowing where you stand on the money vs. emotion answer helps with the decisions you need to make.

Maximizing retirement income is an objective we all share, and there are many ways to reach the goal. Your Salmon Sims Thomas tax advisor is happy to talk about options with you to increase income and minimize taxes.