Pros & cons: Should you pay off your mortgage before you retire?

If you bought or refinanced your home when you were in your mid-30s or older, you may find yourself headed into retirement with a mortgage in tow. You may have gotten a 30-year fixed-rate mortgage or maybe you took out a home equity loan or line of credit to support a project or passion. Now you've realized your final payment won't happen until after you're retired. It's natural to wonder if you should pay off your mortgage before you retire or just keep on with scheduled payments.

Conventional wisdom would say it's preferable to go into retirement without a mortgage, but your situation may call for a different approach. You have financial and emotional factors to consider: How would paying off your mortgage early affect your retirement nest egg? Will you be able to afford a monthly payment once you retire? How will you feel about having debt and making monthly loan payments once you've stopped working? What's your financial risk tolerance level? Let's explore the options you have when you're considering whether or not to carry your mortgage into retirement.

Here are a few scenarios where having a mortgage in retirement could work to your benefit.

If you took out a fixed-rate mortgage anytime from early 2012 through early 2022, there's a good chance your interest rate hovers around 4% or lower. The inflation rate has been 4% or higher since June 2021, according to data from the U.S. Bureau of Labor Statistics.

When the inflation rate is higher than your mortgage rate, you're coming out ahead. You're repaying your loan with dollars that don't buy as much as they used to. It can actually pay to keep your mortgage in this situation.

It also can pay to keep your mortgage for as long as possible if it's the least expensive way for you to borrow money. After all, your home is an asset that can work for you. You may want to support your child with wedding costs or need to repair your roof, and tapping into the equity of your home could be an option. Or perhaps you want to repay other debt by consolidating it into a home equity loan with a scheduled payoff plan. If the choice is between carrying mortgage debt or high-interest credit card debt, then the home loan may be the better option.

If you opt to itemize your tax deductions and claim your mortgage interest, you also could come out ahead. Homeowners with significant charitable contributions, medical expenses, state and local income taxes, and other itemized deductions may be saving money on taxes—effectively reducing their mortgage rate—with this type of deduction. Just be sure to check if your standard deduction actually may save you more money before deciding to itemize.

If the inflation rate is lower than your mortgage rate, you likely won't see the same gains with your debt. And if you have more savings than you need to meet your projected retirement expenses, plus a cushion to account for unexpected costs and less-than-ideal scenarios, then paying interest to keep a loan may not be necessary. Here are some other scenarios where it may not be worthwhile to keep a mortgage in retirement.

You'll want to evaluate your sources of retirement income and project how much you'll be able to spend each month without depleting your savings too quickly. Then compare what you can spend against your projected expenses.

If your existing mortgage payment doesn't fit into your projected budget, consider how you will increase your retirement income and decrease your expenses until things even out. That might look like paying off your mortgage early or refinancing with a lower-rate home loan.

While there are many ways to carry debt wisely, many people understandably like the idea of being mortgage-free in retirement to create more cash flow. This goal is certainly worth considering as part of your financial strategy.

You may be someone who would prefer as little debt as possible in retirement for emotional reasons. That's fair: Money is a tool, not a goal, and the way we manage our finances often has much to do with how spending, saving and borrowing make us feel, more so than the straight facts and figures.

If you won't feel comfortable retiring until your mortgage is paid off or feel like you won't be able to sleep well as a retiree with a mortgage hanging over your head, it can make sense to prioritize getting rid of those monthly payments ahead of schedule.

Most Americans don't itemize their deductions—they claim the standard deduction. With the standard deduction, you can't deduct your mortgage interest (unless you have deductible home office expenses, in which case you can deduct the portion of your mortgage interest for your home office).

However, there's uncertainty about what the standard deduction will be in the long run. The Tax Cuts and Jobs Act doubled the standard deduction beginning in 2018, but this provision expires at the end of 2025. We may not know until then whether lawmakers will allow the provision to expire or decide to extend it, make it permanent or do something else altogether.

Perhaps you don't have a mortgage right now but you're thinking of taking one out—possibly to buy your retirement home. If you do, the loan term could extend beyond your retirement. You have some choices:

Choosing a 10- or 15-year mortgage can help you secure a lower rate and pay down your debt faster. You'll pay a lot less interest in the long run and build up home equity faster.

The trade-off is a higher monthly payment. You'll need to assess the monthly payments for different payment terms and their associated rates and see what you can comfortably afford. Falling behind on your mortgage could dampen your credit score or lead to home foreclosure.

You don't want a mortgage payment so high that it doesn't allow you to spend money on what you care about most. If a larger mortgage payment makes your budget too tight, you may struggle to afford other needs and wants and end up not enjoying the life you've worked so hard to build.

Depending on the market conditions, an adjustable-rate mortgage (ARM) may come with a lower rate for the first few years than a fixed-rate mortgage, giving you a lower monthly payment now in exchange for future uncertainty.

For the fixed period of an ARM's term, the interest rate will be fixed, giving you a predictable monthly payment. After that fixed period ends, the rate will adjust at regular intervals, during the adjustable period based on an index that reflects market interest rates. The term of the loan can vary.

When you reach the adjustable-rate period, you could consider refinancing to a traditional mortgage to lock in an ideal rate. Or you might be planning to move before you get to the adjustable-rate period. Otherwise, taking out an ARM means accepting some risk that if you don't refinance or move before the initial fixed-rate period ends, you may have a substantially higher monthly payment.

Many people find themselves approaching retirement with years remaining before their mortgage will be paid off. Just because your parent, sibling or friend chose to pay off their mortgage early or on schedule or opted to refinance, that doesn't mean it's right for you. Your best path forward may depend on some of the factors described previously—your loan rate compared with inflation, your expenses vs. your income, how comfortable you are with debt—and other aspects that are personal to you.

The mortgage loan officers with the  Thrivent Credit Union or a Thrivent financial advisor are here to help you analyze your current situation and evaluate how it fits into your long-term goals.