Many people used to consider a mortgage burning party to be part of the American dream. But things have changed because of the record low mortgage rates in recent years.
You may be tempted to plan on prolonging the note for as long as possible—even well into your retirement years—while you try to eke out a higher investment return. But before you decide to stick with minimum payments, consider the following benefits of having no mortgage payments in retirement:
Having no mortgage gives you peace of mind. Once you eliminate your mortgage, you don’t need to worry about the additional cash flow that would be necessary to pay that monthly bill. You also don’t need to agonize about whether your investments are outperforming the interest you are paying. Owning your house free and clear reduces a huge amount of stress, which is what retirement is all about.
Having equity will increase your mobility and choices in retirement. If you fall significantly behind on your mortgage payments, you could be forced to move. Without a mortgage, you have complete control over where you live. You can downsize or move as soon as you feel that it's best for you or choose to stay in your current home for the rest of your life. Where you live can play a big role in your retirement expenses, so having the choice to stay or go gives you additional control over your finances.
Aggressively paying down your mortgage will help you build equity more quickly. Paying off your home quickly can allow you to avoid paying for private mortgage insurance sooner because you will build equity in your home faster. It could also mean being eligible for the best rates offered by the marketplace by being under the conforming loan limit. You may be able to take advantage of lower rates whenever lenders are offering more competitive terms by refinancing your existing mortgage.
Trying to pay off your mortgage by the time you retire acts as forced savings. Making the decision to have a debt-free retirement means you will have to save more to gradually get there. This not only helps you pay less interest, but it also motivates you to cut down on wasteful spending over the years. For many people, the added savings they are able to accumulate more than makes up for the interest they could get by investing the extra payments in the markets.
Taking less risk means fewer chances that things can go wrong. Even if you are an investing guru all your life, everybody's mental and physical abilities decline with age. You may be able to make more in the stock market than paying off your mortgage now, but this may not be true forever. Unfortunately, many people don't realize the decline until the damage is irreversible. Retiring your mortgage when you retire is often a prudent choice because you are limiting the chances of a catastrophe.
It's up to you whether you want to maintain your debt or eliminate it. Just make sure you understand what you are missing out on if you decide to extend the risks of holding a mortgage.
David Ning runs MoneyNing, a personal finance site that shares money moves you can make to significantly increase your chances of having a comfortable retirement. He likes to share simple changes that anyone can make, such as picking the best online savings account and figuring out whether a 0 percent balance transfer credit card makes sense.