As you head into retirement, should you pay down your mortgage, reducing your debt burden? Or should you hold onto your mortgage, retaining your tax deductions and freeing up cash for other purposes?
In part, that’s a function of your mortgage rate and your expected return on investment, over a long retirement. For example, if you have a 5 percent mortgage, you expect to keep itemizing deductions, and your tax rate is around 30 percent, keeping your mortgage costs you only 3.5 percent a year (70 percent of 5 percent). If you expect to invest the money you would have used for prepayments, and earn more than 3.5 percent, after-tax, prepaying is not the best choice.
What’s more, you shouldn’t pay down your mortgage if that means using money from a tax-deferred account such as an IRA. You’ll accelerate tax payments that could have been deferred.
On the other hand, if you no longer will itemize to benefit from the mortgage-interest deduction—especially now that the standard deduction has been increased substantially due to the 2017 tax law changes—prepaying might be a good choice. Moreover, many retirees just like the security of owning their home outright.