To O'Leary, debt is the enemy of any financial plan — even the so-called “good debt” of a mortgage. According to him, your best chance for long-term financial success lies in getting out from under your mortgage by age 45.
That makes sense, of course, as older Americans have had a longer time to make payments. But with nearly two-thirds of retirement-age Americans having paid off their mortgages, it means that the average age they have gotten rid of that debt is likely in their early 60s.
More Americans are entering retirement with mortgaged homes, and the average balance of those loans is rising. The share of Americans ages 75 and over who are carrying mortgage debt has risen steadily for decades, according to the federal Survey of Consumer Finances: from 5% in 1995 to a historic high of 25% in 2022.
Absolutely. The Equal Credit Opportunity Act's protections extend to your mortgage term. Mortgage lenders can't deny you a specific loan term on the basis of age.
Mortgage debt remains uncommon among homeowners age 65-plus relative to their younger counterparts; in fact, the fraction of homeowners age 65-plus who had a mortgage in 2022 (34 percent) was less than half that of homeowners under age 65 (70 percent) 3.
Generally, a creditor such as a lender cannot use your age to make credit decisions. However, there are exceptions to this rule. For example, age can be considered in a valid credit scoring system but it can't disfavor applicants 62 years old or older.
Paying off a mortgage can be smart for retirees or those who are just about to retire if they're in a lower-income tax bracket. It can also benefit those who have a high-interest mortgage or who don't benefit from the mortgage interest tax deduction.
Nearly half of Americans retiring at 65 risk running out of money, Morningstar finds.
Now, keep in mind, if you are planning to retire at 55, you will need to have enough saved for 20 years or more. Using the formula I just shared, that means you will be living on $40,000 per year or half of the salary you were accustomed to ($800,000 over 20 years). For some people, this would not be enough.
For example, if you plan to travel frequently in retirement, you may want to aim for 90% to 100% of your pre-retirement income. On the other hand, if you plan to pay off your mortgage before you retire or downsize your living situation, you may be able to live comfortably on less than 80%.
Using a 401(k) to pay off a mortgage might make more sense for those nearing retirement and wanting to simplify their finances. You must keep in mind the 10% early withdrawal penalty if you're under 59½ and the potential impact on your retirement income. Carefully weigh the benefits and risks before making a decision.
"If you want to find financial freedom, you need to retire all debt — and yes that includes your mortgage," the personal finance author and co-host of ABC's "Shark Tank" tells CNBC Make It. You should aim to have everything paid off, from student loans to credit card debt, by age 45, O'Leary says.
Age isn't a limiting factor, but your income and mobility may be. If you've built up your savings over the years, you may not want a mortgage, preferring to buy a house outright. How Much Is My House Worth? See your free home value estimate in less than two minutes.
One of the most significant benefits of paying off your mortgage is the peace of mind that comes with owning your home outright. Without a mortgage, you don't have to worry about monthly payments, which can be especially comforting in retirement or during economic downturns.
In 2022, 66.8% of older households had debt. Overall, the older the head of the household is the less likely the household is to have debt. In 2022 in families in which the head was 55-64, 77.2% had debt. That drops to 64.8% when the head is 65-74 and 53.4 when the head is 75 or older.
Using our portfolio of $400,000 and the 4% withdrawal rate, you could withdraw $16,000 annually from your retirement accounts and expect your money to last for at least 30 years. If, say, your Social Security checks are $2,000 monthly, you'd have a combined annual income in retirement of $40,000.
Orman's Cautions Against Paying Off Your Mortgage Early
Don't Drain Your Savings: Orman emphasizes that homeowners should not deplete their emergency savings or retirement savings to pay off their mortgage. These funds are crucial for financial stability and should not be sacrificed.
While many older homeowners own their properties free and clear of a mortgage payment, this is not a feasible reality for many seniors. In fact, more than 10.5 million Americans at or over the age of 65 still pay into a forward mortgage loan, according to a study conducted by LendingTree.
The 2% rule states that you should aim for a 2% lower interest rate in order to ensure that the savings generated by your new loan will offset the cost refinancing, provided you've lived in your home for two years and plan to stay for at least two more.
"There is no reason why a senior cannot apply for a mortgage," Albohn says. "You do not have to prove that you will live 30 years to pay off the mortgage. [But] whether or not a senior should take out a mortgage is an individual decision."
You need to be at least 18 years old to take out a residential or buy-to-let mortgage with us, and it must finish before or on your 80th birthday.
Data collected by NASDAQ suggests that while only 28% of homeowners below retirement age have paid off their homes, nearly 63% of those 65+ have done so. These statistics highlight Americans' importance in entering retirement with freedom from what is usually their highest monthly fixed cost.