I have a $ 250,000 mortgage on my home with 24 years left until the end. Do I have to pay it before retirement in a few years?

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Dear MarketWatch,

I am considering paying off my mortgage. I am 60 years old and have a mortgage of USD 250,000. The house is worth $ 950,000. The mortgage payment is $ 2,800 per month on a 30-year loan. The interest rate is 3.875% and I have 24 years left on the loan.

I live in a high tax state. Taxes are $ 1,200 per month. The house is in good condition, does not need major repairs. I plan to work until I am 67 years old. I will have a pension of $ 8,000 a month. I now have $ 1 million in my 401 (k) and $ 1 million in company stock. I’ll have to sell shares to pay off the house.

Do I have to pay off my mortgage now or wait until I retire after 67?

Thanks,

Awaiting payment

Dear Expectation,

“Do I have to pay off my mortgage in full?” is one of those all-time classic questions that asks the question “Who’s first?” and “What are you Romeo for?”

I am not saying this to make fun of you or your situation, but to understand how common this question is. Indeed, you are not the only reader who recently wrote to me asking me to change this request. I interviewed financial planners for their views on this age-old predicament, and over and over they told me that they have clients tackling this very issue, especially when they retire.

The common wisdom of previous generations was not to retire with debt. But boy, times have changed. “It used to be taboo to retire with debt, but it made sense when you had mortgages with rates higher than 7% or 14%,” said Marianela Collado, CEO and Senior Welfare Advisor Tobias Financial Advisors, a management firm assets. based in South Florida.

We do not live in a world with such high interest rates. Even if your mortgage rate is at least 3% – where is the average rate on a 30 year fixed rate mortgage sitting now – this is almost a complete change compared to what it was several decades ago.

When deciding on early repayment of a mortgage, it is important to make the decision as rationally as possible. It will almost certainly be emotionally beneficial to get rid of that large monthly payment and not have debt to worry about. But this is not necessarily the most financially sensible path.

Like many people thinking about this step, you are thinking about investing your investments and savings for this. If the stocks you are investing in perform any close to the S&P 500
SPX,
+ 0.22%
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Chances are they are making 10% a year on average – if not better.

This is where you need to consider the opportunity costs of this move. If you pay that $ 250,000, you will save more than $ 100,000 in interest, not counting prepayment penalties that may arise. But you would be missing out on a potential $ 1.7 million profit, assuming a 10% rate of return on the investment you would have cashed out to pay off your mortgage.


Using your savings to pay off your mortgage ahead of time can mean giving up thousands of dollars in potential income.

Plus, once you put that money into your home, you can’t use it for other potential needs without taking out a line of credit, getting a reverse mortgage, or selling your home.

“With interest rates this low, paying off your mortgage at a low rate means more of your capital can be freed up for investment,” said Bradley Lineberger, president of Seaside Wealth Management in Carlsbad, California. – A reliable investment portfolio should easily outperform anything. the savings on the interest rate would be due to the redemption of the promissory note. “

Of course, the answer will be different if cash flow is currently an issue or if you expect it to be cash flow in retirement. Since you have a pension that you can count on, this may not be the case. But if you find yourself saving each month after paying off your mortgage – or if you’re worried about your ability to make ends meet in retirement – you might consider using your investment to pay off the loan. This will allow you to live more comfortably with a lower fixed income if needed.

I must add that your situation is not really an either-or question. You have more options at your disposal than just repaying the loan in full or maintaining the status quo.

Given that your current rate is higher than the rates prevailing in the market right now, you might even consider refinancing your mortgage. You can potentially refinance a mortgage for a shorter term, such as a 15-year loan, without increasing your monthly payment. This will save you interest and pay off your loan faster.

You can also continue to renegotiate your mortgage if your lender or support staff allows it. When a mortgage is renegotiated, the homeowner pays a large lump sum to pay off the loan principal. The lender then restates the amortization of the loan. Thus, your monthly payment will be lower, although the interest rate and loan term will remain the same.

A mortgage renegotiation is less expensive than refinancing and does not require a credit check or appraisal. However, keep in mind that the lender may charge a fee for this, and not all homeowners are eligible to do so. However, if this option is available to you, it can be a great way to find the middle way between the options you are considering.

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