If you’re thinking of retiring soon and think it’s best to pay off your mortgage before you do, that can be a good idea but only if you’ve stabilized all your other financial obligations. Here are some things to consider before throwing extra money at your mortgage:
1. Your retirement savings are low: Many Boomers have not saved enough to retire for a number of reasons. Financial planners say that if you are near retirement age, you should be “maxing out” your retirement contributions. If so, it’s likely the interest earnings on your retirement account exceeds the low interest on your mortgage. If not, it makes more $$ sense to add to your retirement account before paying down/off your mortgage.
2. Credit Card, Loan, Debt: Pay down/off credit card debt, and/or other higher interest loans, before going after your lower interest mortgage. This not only raises your credit score (making it easier to get a loan in the future should you need one) but opens up room on emergency money sources you may need to draw on later. Mortgage interest can be written off on taxes where credit cards, etc, cannot. Also, save some money by applying for 0% interest balance transfer credit cards that can save you 6 months to 1 year in interest money.
3. Low emergency fund: Financial planners say you should have at least 2 years of living expenses saved as an emergency fund. This may be hard for many people who are under-employed or have been unemployed since the economy went sour. But finding a way to put some cash aside for an emergency can help you. Consider a second, part-time job. Also, don’t borrow from your emergency fund to pay down your mortgage.
4. Inflation may happen: When the economy picks up in the future, economists say that inflation may accompany it like it did back in the 70s. Interest rates will rise and having to depend on credit cards will put you further in debt. Having a cash reserve will help you handle higher prices without jacking up your debt further.
5. Interest rates can go up: When the economy is in better shape, it’s a good bet the Feds will raise interest rates back up. That means that any money (retirement funds, emergency cash fund,) you have in the bank will gain higher interest than the interest you’re being charged on your mortgage. Trying to get a loan for cash when interest rates are higher may be tougher for you as well depending on your credit rating.
The better idea: Put some emergency cash away first, pay down/off higher interest credit cards and loans, add to your retirement funds that will gain more interest if rates go up, and then revisit paying down/off your mortgage when you’re in better financial waters.