Ask Stacy: Is It Smarter to Retire Mortgage-Free?

The numbers point one way, your instincts another. These five questions help decide.

Several years ago, my friend Tom phoned me one Sunday morning after getting two sharply different opinions from two financial advisers.

“Stacy, I’m 59. I still owe $180,000 on a mortgage at 3.1%, and I have $300,000 in a money market fund earning more than 4%. One adviser says I should pay off the house, sleep better, and move on. The other says it would be foolish to pay off cheap debt while my cash earns more. Who’s right?”

The truth is that both were right — they were simply answering different questions.

This debate is one of the biggest in personal finance, and advisers are split on it. The math pushes in one direction, while lifestyle and cash-flow considerations push in the other. Most coverage takes a side and leaves out half the picture. I won’t do that.

This question matters a lot for boomers and Gen X. According to Marketplace’s reporting on Joint Center for Housing Studies of Harvard University data, the share of homeowners ages 65 to 79 with a mortgage has climbed from 24% to 41% over the past three decades. The old mortgage-burning celebration is mostly history.

These are the five questions that really settle the issue.

1. What is the interest rate?

This is the most important factor by far.

If you locked in a 3% mortgage in 2020 or 2021, you may be holding the cheapest borrowing you will ever see. Paying it off means giving up that advantage.

At the same time, very safe Treasury bills and high-yield savings accounts have recently paid around 4% or more.

The math is stark: paying off a 3% mortgage with cash earning 4% is essentially accepting a guaranteed 1% loss on every dollar.

Now reverse the situation. If you have a 7% or 8% mortgage from a recent home purchase, the calculation changes completely. Paying that debt down is like locking in a guaranteed 7% or 8% return. Few investments can match that.

The rule of thumb: below 4%, the case leans toward keeping the mortgage. Above 6%, it leans toward paying it off. In the middle, other factors should drive the decision.

2. Where would the money come from?

If you would need to pull money from a 401(k) or IRA to eliminate the mortgage, pause before doing that. Withdrawals from tax-deferred accounts are taxed as ordinary income, and a large withdrawal can bump you into a higher tax bracket and potentially affect Medicare premiums later.

That trade-off is usually not worth it. If you are determined to reduce the mortgage, use after-tax savings or make extra monthly payments from your paycheck.

3. What will your retirement cash flow look like?

This is where strict number-crunching can miss something important. A mortgage payment is not just a line item — it is a monthly obligation that must be covered for as long as the loan exists.

If your retirement income from Social Security, a pension and a 4% portfolio withdrawal comfortably covers the mortgage and your other expenses, you may not need to rush to pay it off.

But if your retirement income is tight, removing your biggest fixed expense can change the picture quickly. A downturn in the market feels less dangerous when your monthly obligations are smaller. Many retirees say paying off their mortgage was the best emotional decision they made.

On the other hand, there are still valid reasons to keep the mortgage in retirement, especially when rates and tax treatment favor holding the debt.

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4. Will you still itemize deductions?

For many years, the mortgage interest deduction was the main argument for keeping a mortgage. That changed in 2017, when the standard deduction roughly doubled and most retirees stopped itemizing altogether.

If you take the standard deduction, mortgage interest no longer provides any tax benefit.

That used to be a strong reason to keep a mortgage. For most retirees, it no longer is.

5. How will it affect your peace of mind?

This question matters more than many people admit. Some homeowners never worry about their mortgage. Others wake up in the middle of the night thinking about it.

If you are in that second group, the spreadsheet may not matter much. Paying off the loan could be the right move simply because peace of mind is worth more than the interest-rate difference. I have never met anyone who paid off a home and regretted it, and that includes me. After passing the CPA exam, winning Emmys and marrying Sara, it was one of the highlights of my life.

The broader trend helps explain why this issue keeps coming up. AARP, citing a 2018 survey by national mortgage banker American Financing, reported that 44% of Americans between 60 and 70 retire with a mortgage, and as many as 17% of those surveyed said they may never pay it off.

Carrying mortgage debt into retirement is becoming more common than not.

The middle path that often gets overlooked is this: don’t wipe out the entire balance, but make extra payments. Adding $200 or $500 a month to principal can shorten the loan by years, build equity faster and still let your liquid savings keep working. You do not have to choose only one extreme.

Tom, by the way, kept his 3.1% mortgage and left the cash invested where it could earn more. He also said he would probably pay the loan off if savings rates ever dropped below his mortgage rate. That sounds sensible to me.