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.
"Shark Tank" investor Kevin O'Leary has said the ideal age to be debt-free is 45, especially if you want to retire by age 60. Being debt-free — including paying off your mortgage — by your mid-40s puts you on the early path toward success, O'Leary argued.
When it comes to managing your mortgage as part of retirement planning, the general recommendation is to pay off your mortgage before retirement. This helps reduce expenses and eliminate debt, which will provide peace of mind in your later years.
Similarly, states along the Pacific Coast—where home values skyrocketed during the pandemic—have some of the lowest rates of free-and-clear homeownership among the working-age population. California (22.7%), Washington (22.8%), and Oregon (22.9%) sit at 45th, 44th, and 43rd out of all 50 states, respectively.
"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.
In fact, the average millionaire pays off their house in just 10.2 years. But even though you're dead set on ditching your mortgage ahead of schedule, you probably have one major question on your mind: How do I pay off my mortgage faster?
Orman recommends that you aim to be mortgage-free by the time you retire. That's because everything you owe, including your home, costs you money, but it can affect your mental health as well. "Debt is bondage," she says. "You will never, ever, ever have financial freedom if you have debt."
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.
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.
Paying off your mortgage early frees up that future money for other uses. Your mortgage rate is higher than the rate of risk-free returns: Paying off a debt that charges interest can be like earning a risk-free return equivalent to that interest rate.
Being debt-free can mean less activity on your credit history and potentially even hurt your credit score. Higher mortgage rates: A major downside of going debt-free negatively impacts your credit score is that you might not get the best deals on things like mortgages.
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.
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%.
What is an older home? As a general rule of thumb, homes built after 1990 are considered newer, and homes built before 1920 are considered “old” or “antique.” But housing age is a subjective condition that turns on numerous factors. The most important include: Construction Style and Quality.
An unmortgaged home was once a retirement perk
Mark Iwry, nonresident senior fellow at the Brookings Institution. But that pattern is changing. In the Michigan study, researchers found that the share of retirement-age homeowners with mortgages rose from 38% to 51% in a generational span of about 25 years.
If you pay $200 extra a month towards principal, you can cut your loan term by more than 8 years and reduce the interest paid by more than $44,000. Another way to pay down your mortgage in less time is to make half-monthly payments every 2 weeks, instead of 1 full monthly payment.
The 28% mortgage rule states that you should spend 28% or less of your monthly gross income on your mortgage payment (including principal, interest, taxes and insurance). To gauge how much you can afford using this rule, multiply your monthly gross income by 28%.
Paying off a second mortgage is sometimes considered a “rate-and-term” mortgage refinance rather than a cash-out refi. This can be an advantageous repayment option, since rate-and-term refis come with lower rates and fewer restrictions. Shop rates for your cash-out refinance.
O'Leary's Take on Paying Down Mortgages
According to him, your best chance for long-term financial success lies in getting out from under your mortgage by age 45.
You may not want to pay off your mortgage early if you have other debts to manage. Credit cards, personal loans and other types of debt usually carry higher interest rates than your mortgage interest rate. Remember, the higher the interest rates, the faster your accounts accrue debt.
He goes on to say: “Paying off your mortgage early seems impossible but it is completely doable and people do it all the time, but how can you do it and why would you want to put in the extra effort? Paying off your mortgage early will rev up your wealth building.”
A homeowner is considered house-rich, cash-poor when they have wealth tied to their home but lack readily available cash to meet their everyday living expenses. Being cash-poor can result from a myriad of factors, such as unexpected expenses, debt, budgeting issues, medical concerns, or reduced income.
Paying off your mortgage early can be a wise financial move. You'll have more cash to play with each month once you're no longer making payments, and you'll save money in interest.
Not only is 96% of mortgage debt in the U.S. fixed rate, but 38.5% of homeowners don't have a mortgage at all.