Should You Pay Off Your Home Before You Retire?

by Tim on August 15, 2011

Picture Dave, a 52 year old father of three who plans on working until he can no longer stand to work.  He really hasn’t saved much for retirement and has a mortgage payment of $1,200 with $50,000 left on the mortgage.  He and his wife have approximately $40,000 in savings and investments and he is considering using his savings to drastically reduce his mortgage and pay it off in the next few years.

Is this a wise move?

Obviously, we can’t see the entire picture from the 100 word paragraph above, but there are a few things that should not be looked over if you were in Dave’s shoes.  I’ll make note of a few and welcome suggestions in the comments as you think of them.

While it would be nice to have ALL debt paid for (especially as you near retirement) it’s important that you don’t forget about the other aspects of your financial picture.

Don’t use up your emergency fund.

For a working couple, most financial experts would suggest a 6-12 month emergency fund.  If I were in Dave’s situation, I would want to be on the higher end of that statistic with respect to an emergency fund.  This doesn’t leave much room in his $40,000 of savings to apply towards the house.

What’s your income situation look like?

Do you anticipate a drop in your income within the next few years?  How about an unexpected drop in your income from an unexpected layoff?  If you put your entire savings (or a good chunk of it) into your home, you won’t have access to it without taking a line of credit, or selling your home.  In this market, both may be difficult tasks to complete quickly.

What about your expenses?

Dave’s no spring chicken and with retirement around the corner, so are the potentially higher medical bills.  A recent report from Fidelity showed that a 65 year old couple retiring this year will need $250,000 to cover medical costs throughout their retirement years.

And don’t forget the kiddos.  They’re about to head out to college and may need some help getting their feet on the ground.  Of course, they can borrow for school – Dave can’t borrow for retirement.

Will you stay there for good?

Before Dave dumps all his money into a home for the sake of being ‘debt free’ or eliminating an annoying house payment, he needs to honestly ask the question: Do we plan on moving in the next 5 years?  If downsizing is in the immediate future, there isn’t really a good reason to tie up all that money into a home with the hopes that you’ll get it back after selling it.

On the other hand, if moving is not likely, you may want to seek advice on refinancing your home.  It is possible that refinancing would not only save on interest payments, but also accelerate the payoff.

At the end of the day, cash is king and if you can find other ways to reduce debt while maintaining a strong cash position, I’d consider that first.

So what would you do if you were Dave?   Put money towards the home and ditch the payment, or float the payment while you maintain your cash reserve and continue to save for retirement?


Meet you in the comments!

Tim is a personal finance writer at Faith and Finance a Christian financial help blog that provides financial insights for individuals, businesses, and churches. Outside of finance, Tim enjoys spending time with his wife, playing the saxophone, reading economics books, and a good game of RISK or Catan. Find him on Twitter and Facebook and subscribe to the Faith and Finance RSS feed.


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