How important is it to be mortgage-free when you retire? Everyone’s situation is different. Here are some things to consider when deciding when and if you should pay off your mortgage.

The “American Dream” of homeownership is supposed to go something like this: You buy a house in your late 20s or early 30s, diligently make payments on your 30-year mortgage and pay off that loan well before retirement.

That may have been the reality for your grandparents or even your parents, but today more people are still making mortgage payments well into retirement.

What is more likely these days is that you’ll buy a “starter” home in your mid-30s, live there a handful of years, move into another home, and possibly even another. (Renting? Don’t forget renters insurance.) You’ll acquire a new, and probably bigger, mortgage with each new property. Case in point: I’m about to turn 50. I bought my first home in my late 20s and am now living in the fifth home I’ve owned. If we never move again and stick to our payment schedule, this mortgage will be paid off just a few years before I turn 80.

Me? I don’t want to be strapped with a mortgage payment well into retirement (or into retirement at all), so I’m considering how to go about getting rid of it, particularly because it’s unlikely we’ll end up living in this house more than a few more years.

Should I pay off my mortgage ASAP?

If you’re like me and are considering the pros and cons of paying off your mortgage before retirement, it’s important to know mortgage debt isn’t necessarily a bad thing. Unless you owe more on your home than it’s worth or you’re strapped with expensive, overwhelming financing, you can relax a little knowing on-time mortgage payments are a positive for your credit scores.

That matters because good credit saves money on things like credit card interest rates, insurance premiums, and even your mortgage payments themselves. Over time, the savings can be substantial. So, unless you’re at or quickly nearing retirement, don’t fret too much about those monthly payments.

With that said, here are some things to consider when deciding when and if you should pay off your mortgage debt.

When you should consider paying off your mortgage

1. You have the cash.

If you have enough or close to enough cash sitting in a money market or equally liquid account, it could save significant interest if you go ahead and pay off your mortgage, in part or in full. It’ll free up cash you can reinvest in the funds each month.

2. There are no tax savings.

If you’re like a lot of Americans, you’ll be taking the standard deduction instead of itemizing. That means your mortgage interest deduction is essentially worthless. In that case, it may be well worth reducing your liquid assets to pay off your mortgage.

3. You want to free up the income.

If your monthly cash flow needs a boost, paying off your mortgage is a great option. It doesn’t mean you won’t have access to the assets you use to pay off the loan. Instead, those assets will rest in your home. You can access them through a home equity loan or line of credit, or even a reverse mortgage later in retirement.

When you should not consider paying off your mortgage

1. You’re cash-strapped.

If paying off your mortgage would leave you without an emergency fund, it may not be wise to do so, even if it would free up your monthly cash flow. Instead, you may want to consider making larger monthly payments toward your mortgage to pay it off more quickly rather than doing so all at once.

2. You’d pay penalties.

If your mortgage includes a pre-payment penalty for paying off the debt early, it may not be a good idea. Check with your bank to see what is possible and just how much an early payoff will cost.

Likewise, if the funds you’d use to pay off your mortgage are tied up in an individual retirement account or 401(k), consider whether you’d pay a penalty for early withdrawal and if it makes sense financially to do so.

3. You’re not already maxing out your retirement contributions.

If you’re still working and aren’t contributing the maximum amount possible to your 401(k) and IRAs, it’s often better to make those a priority before your mortgage. Talk to your accountant or other financial professional to see what’s best for your situation.

4. You have other higher-interest debt.

If you’re carrying credit card debt or have other loans that cost more in interest than your mortgage, it’s a good idea to pay this debt off first. Remember that mortgage debt can help your credit score. Carrying credit card debt, however, won’t, since it directly affects your credit utilization. The higher your carried balances, the lower your credit score. 

This article originally appeared on Policygenius.

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Reviewed April 2023