There was a time in America when a paid-off mortgage was considered the gold standard for financial security. Those who could afford a home mortgage – less than half of the adult population until the mid-1940s – were generally determined to pay those loans off as quickly as possible, partly for cultural reasons including a general aversion to debt.
Today, that aversion has generally vanished. Roughly 28 percent of homeowners 75 and older still carry a mortgage – up from about 12 percent in 1998. But it does raise the question: how much emphasis should those preparing for retirement place on paying off their home?
We consulted this recent Investopedia article for some insight, and – as is often the case – came away with a mix of answers. According to the article, prepared by financial reporter Dara-Abasi Ita, the question of whether or not to make a paid-off home your top priority is generally going to depend on your individual circumstances and priorities.
With that in mind, let’s see how well Ita’s article does in telling us when to let the mortgage ride, and when to make the push for an early pay-off.
Is a Paid-Off House a Responsible Move or a Costly One?
“Paying off your mortgage early sounds like the responsible move,” Ita begins. “Often, it can be the expensive one.”
He adds that almost half of American families don’t have any type of retirement account, and among those who do, the median balance is around $86,900—enough to cover roughly four years of household expenses, maybe slightly more [according to the Federal Reserve Board.]
“When you throw every spare dollar at the mortgage instead of funding your retirement, you might enter retirement with little beyond Social Security and a home you’re reluctant to sell,” Ita writes. “You might win the house but lose the lifestyle you wanted it for.”
The Danger of Becoming “House-Rich and Cash-Poor”
Ita observes that home equity “looks great on a net worth statement” but isn’t practical or accessible as a way to pay for necessary items.
“If most of your wealth is locked in your home when an emergency hits, cash is what you’ll wish you had,” he adds. “A National Institute on Retirement Security analysis found that American workers have saved just 4 percent of what retirement guidelines recommend in their 401(k)s and IRAs. But count the value of their homes, and they’re at 41 percent.”
High Housing Costs Coupled with Employment Insecurity
In 2024, according to a 2024 Harvard University study, 33 percent of American households spent more than 30 percent of their income on housing. Sixteen percent spent more than half. Of this statistic, Ita observes that many Americans are “housing cost-burdened.”
He adds, “And 40 percent of retirees leave the workforce earlier than planned, typically due to health problems or company changes,” according to data from EBRI – the Employee Benefit Research Institute.
Rules of Thumb: When Paying Off Early Makes Sense
Ita highlights specific scenarios where accelerating your mortgage payments might actually be the right financial move for your future.
If your mortgage rate is 6 percent or higher and you’d rather lock in a risk-free “return,” paying it off makes sense. You might also consider it if you’re close to retirement with solid savings and want to shrink your monthly fixed costs.
Furthermore, if you’ve already maxed out your retirement contributions and have a healthy emergency fund (the typical recommendation is to save three to six months of living expenses), an early payoff is viable. Finally, the psychological relief of being debt-free might outweigh the math—as long as it doesn’t leave you short on liquid savings.
How to Properly Allocate Your Financial Resources
As for allocating resources, Ita suggests that—for most people—the answer is a “sequence of priorities.”
First, he suggests maximizing 401(k) participation by capturing any employer retirement matches before making a single extra mortgage payment. Second, he says, build an emergency fund—he calls it a “cash cushion”—that can handle sudden unemployment or a large medical bill.
Next, rank your debts by interest rate from highest to lowest. Highest is typically credit cards, Ita notes, but whatever it is, pay the highest-rate debt first.
Then, finally, attack the mortgage. “Your mortgage will likely rank in the middle or near the bottom, depending on when you bought or refinanced,” Ita writes. “Once you’ve cleared the higher-rate debts, start making extra mortgage payments. Aim to finish your mortgage closer to your planned retirement date, not necessarily decades early.”
Comparing Strategies with a Second Financial Perspective
After reviewing Ita’s article in Investopedia, we still had some unanswered questions. So we sought out another view, this one from the Charles Schwab website. It provides a straightforward “should-you-or-shouldn’t-you” checklist that might prove helpful. We’ve summarized the list somewhat for brevity.
You might want to pay off your mortgage early if you’re trying to reduce your baseline expenses. If your monthly mortgage payment represents a substantial chunk of your expenses, you’ll be able to live on a lot less once that payment goes away.
You may also want to save on interest payments. Depending on a home loan’s size, interest rate, and term, paying off your mortgage early frees up those funds for other uses.
Consider if your mortgage rate is higher than the rate of risk-free returns. Paying off a debt that charges interest can be like earning a risk-free return equivalent to that interest rate. If your mortgage rate is higher than the interest rate available through prudent investment, you’d be better off paying down the mortgage than investing the money.
Lastly, you might prioritize peace of mind. Paying off a mortgage can create one fewer worry and increase flexibility in retirement.
When to Avoid Early Mortgage Payoffs
Conversely, there are many reasons to keep your current payment schedule and focus your cash elsewhere.
You might not want to pay off your mortgage early if you need to catch up on retirement savings. If you completed a retirement plan and discovered that you aren’t contributing enough to your 401(k), IRA, or other retirement accounts, increasing those contributions should probably be your top priority. Savings in these accounts grow tax-deferred until you withdraw them.
It is also a risk if your cash reserves are low. You don’t want to end up house-rich and cash-poor by paying off your home loan at the expense of your reserves. We recommend keeping a cash reserve of three to six months’ worth of living expenses in case of emergency.
If you carry higher-interest debt, that should be your focus. Before you pay off your mortgage, first pay off any higher-interest loans—especially nondeductible debt from sources like credit cards. It’s also good to create a habit of paying off nondeductible debt every month—rather than allowing the balance to build—so that you’ll have fewer expenses when you retire.
Finally, you might miss out on investment returns. If your mortgage rate is lower than what you’d earn on a low-risk investment with a similar term, you might consider keeping the mortgage, paying it off gradually, and investing what extra you can. But if you consider investing in riskier or more-volatile investments, remember that those investment returns fluctuate, and higher returns are not guaranteed.
Rajiv Nagaich – Your Retirement Planning Coach and Guide
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Preparing for a Successful Retirement Journey
You’ve heard Rajiv say it repeatedly: 70 percent of retirement plans will fail. If you know someone whose retirement turned into a nightmare when they were forced into a nursing home, went broke paying for care, or became a burden to their families – and you want to make sure it doesn’t happen to you – then these materials are your key to retirement success.
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And remember, Age On, everyone!
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