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Should You Pay Off Your Mortgage Before You Retire?

Once a homeowner’s working years are over, existing mortgage debt can eat into retirement income. There are, however, instances when having a mortgage in retirement can benefit homeowners, provided they make the right financial moves.

Here’s a closer look at how a mortgage could impact your finances during retirement.

Look At Your Mortgage Rate

When deciding whether to pay off your mortgage or carry it into retirement, it’s a good idea to compare your mortgage rate with potential investment returns.

“In general, paying off your mortgage makes the most sense when the interest rate on your loan is higher than the long-term average expected return on your savings and investments,” says Dana Anspach, founder of Sensible Money, a fee-only financial advisory firm in Scottsdale, Arizona. “For workers relying solely on Social Security for guaranteed income, extending their working years to pay off the mortgage before retirement can bring greater financial peace of mind and reduce stress.”

[Read: Where Retirees Can Buy a Home Overseas for Under $100K]

Don’t Leverage a Lump-Sum Retirement Payment

Some retirees may be tempted to use a lump-sum retirement payment to pay off a home. This may not be a good idea.

“Due to the associated taxes, it rarely makes sense to take a large lump sum distribution from a retirement account to pay off a mortgage,” Anspach says. “And those retirees with mortgage rates below 5% should think twice about paying it off. During inflationary times, low-cost debt can act as a good financial hedge for retirees.”

Instead, focus on eliminating higher-interest debt before your mortgage.

“Thoughtful debt reduction typically starts by paying down high-rate or variable-rate debt first, such as credit cards, auto loans, personal loans or home equity lines of credit. A mortgage is usually last in the hierarchy,” Anspach adds.

[READ: Retirement Accounts You Should Consider.]

Prioritize Building an Emergency Fund

Retirees need a proper emergency fund before paying down mortgage debt.

“Issues will come up, and you’ll want to have an emergency fund just in case,” says Derek Mazzarella, a certified financial planner at the investment firm Gateway Financial Partners in Glastonbury, Connecticut.

The same goes for general savings accounts, too.

“If paying off your mortgage would deplete your savings, it doesn’t make sense to pay off your mortgage,” says Jennifer Beeston, senior vice president of mortgage lending at Guaranteed Rate Mortgage in Coral Springs, Florida. “It’s critical to have a cushion in retirement, and sometimes people rush to pay off their mortgage without considering their actual day-to-day living costs and potential emergency situations.”

Be Mindful of Taxes and Medicare

Pay close attention to the impact of paying off a mortgage on retirement tax rates.

“If you have most of your retirement in a pretax individual retirement account or 401(k) and you use those funds to pay off your mortgage, you may put yourself in a higher tax bracket and Medicare premiums may cost more,” Mazzarella says. “By paying off the mortgage, you may have inadvertently added other unintended costs.”

[When You Need to Pay Taxes on Social Security]

When Peace of Mind Is a Priority, Pay It Off

The emotional comfort of being debt-free should align with your values and retirement goals.

“Paying off your mortgage before retirement can definitely provide peace of mind, reduce monthly expenses and free up cash flow when you’re no longer earning a paycheck,” says Melissa Murphy Pavone, founder of Mindful Financial Partners in Westhampton Beach, New York. “It might make sense if you are debt-free and have sufficient retirement savings to support your lifestyle and cover unexpected expenses.”

“I tell my clients to look at paying off their mortgage as a tax-free, risk-free return of the interest saved,” says Jay Zigmont, founder and CFP at Childfree Wealth in Mount Juliet, Tennessee. “While it’s possible to make more money in the market than paying off your mortgage, it’s not guaranteed.”

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Should You Pay Off Your Mortgage Before You Retire? originally appeared on usnews.com

Update 01/15/25: This story was published at an earlier date and has been updated with new information.

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