I’ve had clients close to retirement to asking, “Should I pay off my mortgage before I retire?” The bottom line up front is that in the long run, dollar for dollar its very likely you would much better keeping a low interest mortgage and investing that cash in a moderate risk portfolio. But YOUR decision to keep or pay off your mortgage depends on a lot more than just a spreadsheet.

First do you have the cash available to pay off your mortgage or some extra income now that you can use to make extra payments and pay it off sooner? Why are you considering paying it off early? Will it help you sleep at night? Honestly, if having a mortgage payment in retirement will have you living in fear of losing your home, it doesn’t really matter what the numbers say or what opportunities you leave on the table.

Other benefits of paying it off are you won’t have to pay interest on a loan you don’t have. No mortgage can improve your cash flow with lower fixed costs each month. This can be a big help if your circumstances change.

And keeping your mortgage? First, you’ll need to have income coming in to make a mortgage payment along with your other expenses. If you can, you may end up much better off if you don’t pay that mortgage off now. And instead invest that money, and enjoy years of compounding growth. Especially if you financed or can refinance at these historically low home mortgage interest rates.

Let's say you have a mortgage with a 3% interest rate, balance right now of $200,000, and 15 years of payments left. Or refinance to a 15 year mortgage at 3%. Over 15 years, you would pay just over $48,000 in interest. Pay off now and you save $48,000.

Now instead of pay off the mortgage, you invest that $200,000 in a fairly conservative, diversified investment portfolio of half stocks and half bonds. Historically, this will earn you a return of at least 6%. That $200,000 invested for 15 years with a 6% annual return will grow to just over $490,000. That’s a profit of $290,000. Now you still had to pay $48,000 of mortgage interest. Which still leaves you more than $250,000 better off by keeping your mortgage and investing!

I mentioned your decision is about more than just a spreadsheet. Paying off your mortgage is a sure thing. That $200,00 disappears form you bank account and you own your home free and clear, period. If you keep your mortgage, with a fixed interest rate that interest cost is a sure thing. BUT, that investment return is not guaranteed.

For keeping your mortgage to be a better option for you, your overall return on your investments needs to be higher than your mortgage interest rate over the life of your loan. Even with conservative investment portfolio there is a very good chance that keeping your mortgage with a low interest rate is better choice, but there is no guarantee. Again, this is where having a reliable cash flow in retirement and emergency fund are key.

In the end it comes down to what options are available to you and how you tolerate uncertainty. Let’s do a quick review. If you are comfortable with some uncertainty, you will have reliable income to pay your expenses in retirement, including a mortgage payment, and you can lock in a mortgage interest rate that is lower than the profit you can expect from investing, keeping that mortgage could be a very good choice for you and leave you with a higher net worth.

If you don’t think you’ll have the income to cover all your retirement expenses and a mortgage, or you won’t sleep at night with a mortgage payment having over you head, no matter what the numbers say, your best choice will probably be to go with the sure thing and pay it off.

And if you still have a mortgage over 3% your window for getting a lower rate is is probably closing. For more info on the refinance decision go back to Episode 18.