Here's a Good Reason Not to Pay Off Your Mortgage Before You Retire

You'll often hear that it's a good idea to try to pay off your mortgage before retirement. The logic is that many people see their income drop once they stop working. So having fewer bills to grapple with could make retirement less financially stressful.

Meanwhile, many people find that their mortgage is their single greatest expense. Having it paid off ahead of retirement is generally a pretty desirable thing.

In many cases, it's a smart idea to try to be mortgage-free by the time retirement rolls around. But there's one situation where paying off a mortgage before retiring doesn't make sense.

When you have a low rate on your mortgage

These days, the average rate on a 30-year mortgage is 7.29%, says Freddie Mac. But in 2020 and 2021, mortgage lenders lowered their rates substantially, allowing many buyers to lock in 30-year loan rates at or around 3%. Plus, many existing homeowners refinanced during that time to lock in those super low rates.

If you're paying 7% or more on your mortgage, then it could very much make sense to knock out your home loan balance ahead of retirement. But if you're paying 3% on your mortgage, then it could be smarter to carry that mortgage into retirement and just keep making your monthly payments. This especially holds true if you're about to retire and are thinking of removing a large chunk of your savings to pay off your home.

Let's say you owe $20,000 on your mortgage and have a fixed rate of 3% locked in on that loan. Right now, many high-yield savings accounts are paying upward of 4% interest. So in that case, it makes more sense to keep your money in the bank (and perhaps switch to an institution with a more favorable interest rate) rather than put it into your home loan. You can come out ahead financially by earning interest rather than paying off a balance with a very low interest rate.

Also, you never know when you might run into an expensive issue with your home or some other unplanned bill. Having money in the bank is crucial at a time when you're no longer working. If you're not being charged a lot of interest on your mortgage, then you might as well leave yourself with extra cash.

Paying off your mortgage is a personal decision

Some people really hate the idea of owing money in any form. If you feel that carrying a mortgage balance into retirement will make your senior years more stressful, then it could make sense to pay off your mortgage even if you locked in a competitive rate and can technically earn more money in a bank account. After all, having peace of mind is important.

But otherwise, don't necessarily rush to pay off your mortgage before you retire. If you have a low interest rate on your loan, you might as well leave yourself as flush with cash as possible, especially while banks are still paying attractive interest rates.

Once savings account rates start to fall, you can reconsider that decision. But for now, it makes sense for a lot of near-retirees to plan to carry their home loans with them rather than pay them off.