Most homeowners purchase their homes with a mortgage from a lending institution, and a surprising number still have mortgages when they retire. CNBC reports that as of 2007, the Center for Retirement Research at Boston College found 41 percent of 60- to 69-year-old homeowners still had a mortgage. Though retirement may be years away, even young couples buying their first homes should consider several key advantages to paying off a mortgage prior to retiring.
Reduces Financial Stress
No one wants to begin retirement burdened by financial stress. Not having a mortgage when you retire makes it easier for couples to focus on adjusting to a retirement income as a large expense has been removed. Worrying about meeting mortgage payments on a fixed income can have a negative effect on an individual's ability to enjoy retirement.
Reduces Monthly Expenses
For most families, housing costs eat up a significant portion of monthly income, and in many cases, the mortgage is the biggest household expense. In retirement, couples are on a fixed monthly income, which is typically less than what they earning while working full-time. Paying off a mortgage before retiring can significantly reduce total monthly expenses in relation to income. This allows you to use your money for other things including pursuits you didn't have time or money for while working.
Reduces Interest Paid
Compounding interest is more beneficial for investors than borrowers. Interest is charged on a mortgage based on time periods, and this interest compounds over time. Compounding meaning you pay interest on interest that has already been charged. Therefore, the longer it takes to pay off your mortgage, the more you will pay in total interest costs. Paying a mortgage off before retirement reduces the interest paid, saving you money that can be invested to increase retirement income.
Improves Debt-Income Ratios
A mortgage is usually the biggest debt for borrowers. Paying a mortgage off reduces the total household debt payments. This improves household debt service ratios that are used to evaluate a borrower's ability to make payments on new credit products. This is important when you apply for any forms of credit, even those you may apply for in retirement such as credit cards or auto loans.
A former financial adviser with more than a decade of experience in personal finance and small business banking, Sarita Harbour is a professional writer specializing in personal finance, small business, technology, and content marketing techniques. Her writing appears online at sites such as Yahoo! Homes and Bob Vila. Harbour holds a bachelor's degree in psychology and computer science from the University of Guelph and the Personal Financial Planning designation from the Institute of Canadian Bankers.