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Should Retirees Pay Off Their Mortgages?

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Updated December 14, 2023

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Paying off the mortgage after 30 years used to be a rite of passage for Americans approaching retirement age but this once-common scenario is no longer the norm. Baby boomers, those born between 1946 and 1965, are carrying more mortgage debt than earlier generations and are less likely than earlier generations to own their homes at retirement age, according to research from Fannie Mae's Economic and Strategic Research Group.

Whether it makes financial sense for retirees or those nearing retirement to pay off their mortgages depends on factors such as income, mortgage size, savings, and the value of the mortgage interest deduction.

Key Takeaways

Paying off a mortgage can be smart for retirees or those who are just about to retire if they're in a lower income tax bracket,
It can also benefit those who have a high-interest mortgage or who don't benefit from the mortgage interest tax deduction.
It's generally not a good idea to withdraw from a retirement account to pay off a mortgage. That could reduce your retirement income too much.
There are other options to consider if you have a hefty mortgage, such as downsizing to a home that fits your retirement budget.

When to Continue Making Mortgage Payments

Making monthly mortgage payments makes sense for retirees who can do so comfortably without sacrificing their standard of living. It's often a good choice for retirees or those who are just about to retire and who are in a high income tax bracket, have a low-interest mortgage under 5%, and can benefit from the deduction on mortgage interest.

This is particularly true if paying off a mortgage would mean not having a savings cushion for unexpected costs or emergencies such as medical expenses.

Continuing to make monthly mortgage payments makes sense for retirees who can do it comfortably and benefit from the interest tax deduction.

It may make sense to do so if you're retiring within the next few years and have the cash to pay off your mortgage, particularly if your money is in a low-interest savings account. Again, this works best for those who have a well-funded retirement account and enough reserve funds for unexpected emergencies.

Paying off the mortgage ahead of retirement can be a real stress reducer. Your monthly expenses will be cut, leaving you less vulnerable to a sudden property tax increase, an emergency repair, or the impact of inflation. You'll save on the interest you would owe by keeping the mortgage.

Entering your retirement years without monthly mortgage payments means you won’t have to use your retirement funds to pay for them.

Avoid Tapping Retirement Funds

Generally, it's not a good idea to withdraw from a retirement plan such as an individual retirement account (IRA) or a 401(k) to pay off a mortgage. You'll incur both taxes and early-payment penalties if you withdraw before you reach age 59½.

The tax hit of taking a large distribution from a retirement plan could push you into a higher tax bracket for the year even if you wait until you're older than age 59½.

It's also not a good idea to pay off a mortgage at the expense of funding a retirement account. Those nearing retirement should be making maximum contributions to their retirement plans.

Research over the past several years has shown that the majority of people are not saving enough for retirement. The National Institute on Retirement Security revealed in a report that more than half (57%) of working-age people didn't have a retirement account. The report adds that the typical worker had a modest account balance of $40,000 even among workers who'd accumulated some savings in retirement accounts.

Strategies to Pay Off or Reduce Your Mortgage

You can use certain strategies to pay off your mortgage early or at least reduce your payments before retirement. Making payments every other week instead of once monthly means that you'll make 26 payments in a year instead of just 12. You might also just pay a little extra each time you make a monthly mortgage payment to whittle down your loan.

Another option is downsizing if you have a larger home. You might be able to buy a smaller home outright with the profit from the sale if you structure the sale correctly, leaving you mortgage-free. The pitfalls include overestimating the worth of your current home, underestimating the cost of a new home, ignoring the tax implications of the deal, and overlooking closing costs.

Should I Refinance My Mortgage to Lower the Monthly Payment?

This would have been an option during the years when mortgage rates were below 5%. Interest rates began to climb steadily in 2022 and had topped 7% by late in the year. Anyone who obtained a mortgage or refinanced one in the years of low interest rates is unlikely to get a better deal in the foreseeable future.

Are Many Retirees Still Paying Off Mortgages?

About 44 percent of retired Americans between the ages of 60 and 70 are still paying off their mortgages. Many of them expect to be paying it for the next eight years. Note that most of them bought their homes more than 20 years ago, and either financed or refinanced their mortgages during the low-interest years.

Is It Worth Keeping the Mortgage to Get the Mortgage Interest Tax Deduction?

Federal tax law changes implemented in 2018 nearly doubled the standard deduction and eliminated many itemized deductions. Since then, fewer Americans have found it worthwhile to itemize their taxes, even if they have mortgage interest to deduct.

The standard deduction for 2022 taxes is $12,900 for single filers and $25,900 for joint filers. If your interest payment (plus any miscellaneous deductions you might have) is less than that, you're better off taking the standard deduction anyway.

The Bottom Line

Paying off a mortgage and owning a home outright before you retire can provide peace of mind but it's not the best choice for everyone. It's best to consult a financial advisor if you're a retiree or a few years away from retirement and have them carefully examine your circumstances to help you make the right choice.

Correction–April 18, 2024: This article has been updated to clarify that making mortgage payments biweekly would result in 26 payments a year, not 13, and to suggest the option of paying a little more with each monthly option.

Article Sources

Investopedia requires writers to use primary sources to support their work. These include white papers, government data, original reporting, and interviews with industry experts. We also reference original research from other reputable publishers where appropriate. You can learn more about the standards we follow in producing accurate, unbiased content in our editorial policy.

Fannie Mae. “Baby Boomers Accelerate Their Advance into Free-and-Clear Homeownership.” Page 5.
Internal Revenue Service. "IRA FAQs - Distributions (Withdrawals)."
National Institute on Retirement Security. "New Report Finds Nation’s Retirement Crisis Persists Despite Economic Recovery."
American Financing. "Reverse Mortgage Basics."

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