Conventional wisdom has long held that it’s better to pay off your mortgage before you stop working and go into retirement. But advisors are seriously rethinking that strategy.

For clients who have a mortgage from prior years, when interest rates were at historic lows, hanging onto the loans may be a better option for retirees in an environment where interest rates are rising, some advisors say.

“Paying off one’s mortgage can be desirable, but it’s not a slam dunk,” said Russ Story, a financial consultant at Story Wealth Management Group in Douglas, Ga.

Advisors say that the current economic environment, with the Fed pursuing a hawkish strategy on interest rates to combat inflation, what advice to give retirees on their mortgages has suddenly become tricky.

For t he most part, some say, the traditional thinking still holds true.

“For most retirees, most of the time, it's best to enter retirement with no mortgage,” acknowledged Charles Lewis Sizemore, chief investment officer at Sizemore Capital Management in Dallas. “Do you really want the stress of a mortgage hanging over your head in your golden years?”

Rocco Carriero, CEO and founder of Rocco A. Carriero Wealth Partners in Southampton, N.Y., concurred. “Because of the importance of maintaining positive cash flow during retirement, I generally advise clients to pay off their mortgage if reasonably possible,” he said. “Eliminating fixed expenses can reduce financial stress, helping one to achieve the ultimate goal—a worry-free retirement.”

Yet that logic may be changing. What’s different today is that mortgage rates have been on a seesaw ride.

Last year, the average rate for a 30-year mortgage was just 2.96%. This year, as the Fed raised interest rates, 30-year-fixed mortgages soared from a low of 3.45% in January to 6.11% in September, a level not seen since the middle of 2008.

“If you have secured a low-rate mortgage, you can theoretically use your liquidity to invest in the market with the goal of achieving a higher rate of return than the cost of your mortgage,” said Amy Sabin, managing director and partner at Steward Partners in Dallas.

Sizemore put it this way: “Mortgage rates, particularly if you bought or refinanced prior to this year, were low enough to be almost free money.”

But of course, you also have to consider how much you can expect in returns from investing those funds instead of using them to pay off your mortgage. “You have to determine if your equity is better in the home or in other investments that may produce income and/or growth,” said Brett Bernstein, CEO and co-founder of XML Financial Group in Rockville, Md.

Holding onto a mortgage in later years seems to be a trend. According to the Federal Reserve, nearly 38% of people between 65 and 74 had mortgages or home-equity lines of credit on a primary residence in 2019, when mortgage rates averaged 3.94%. Back in 1989, when the average mortgage rate was a whopping 10.32%, just 22% of people in that age bracket owed money on their primary residence.

That doesn’t surprise Chris Briscoe, vice president and wealth advisor at Girard, a Univest Wealth Division, in King of Prussia, Pa. “With interest rates so low [in 2019] and markets performing the way they have been for the past five or 10 years, people may have felt more comfortable taking out a mortgage or refinancing in order to lower their existing payments,” he said.

Interest Rate Effect
With interest rates rising, however, those with a low fixed-rate mortgage might be able to earn more in bond yields than they’re paying out for their mortgage.

On the other hand, said Briscoe, the opposite is true for those with a variable mortgage. “As rates increase, so would the interest rates on those loans, causing the payments to increase as well,” he said.

Ken Van Leeuwen, CEO and founder of Van Leeuwen and Co. in Princeton, N.J., said that, with rising interest rates, “the relative attractiveness of maintaining your [variable] mortgage decreases.”

Equity volatility makes it more difficult to generate enough investment returns to offset mortgage payments, too, whatever the type of mortgage.

“The bear market [is] as an additional reason to remain invested instead of paying off your mortgage,” said Van Leeuwen. “The volatility that we’ve experienced in the market lately makes this an inopportune time to sell investments.”

Selling low is never a good idea, of course. But decreasing invested assets also generates sequence-of-return risk, meaning you not only lose the current value of those assets but jeopardize their long-term growth potential.

“I would generally not advise people to sell stocks to pay off a mortgage, even in a bear market,“ said Kimberly Foss, founder and president of Empyrion Wealth Management in Roseville, Calif. “The stock market is likely to recover and resume generating gains and dividends that can pay for your lifestyle, while a paid-for house—while comforting—can’t usually provide an income stream.”

Tax Considerations
Another important factor is the tax implications. The Tax Cuts and Jobs Act of 2017 nearly doubled the standard deduction, causing fewer homeowners to claim a tax deduction for mortgage interest payments. That makes holding a mortgage less economically advantageous.

“It is harder for the mortgage interest to work for you, given the higher standard deduction,” explained Kristina Mello, a financial planner and advisor at StrategicPoint Investment Advisors in Providence, R.I.

What’s more, she said, “If you pay off an existing primary mortgage, it will only increase the equity in your home, offering you more borrowing capability later if needed.”

While that’s true, others pointed out that those who are no longer earning a paycheck often find it difficult to qualify for a loan. “Although paying off your mortgage gives you more equity in your home, it’s harder to access,” said Zach Ungerott, a senior wealth advisor at Hightower Wealth Advisors in St. Louis.

A subsequent home equity loan, he added, “takes time to set up and comes with charges.”

Some advisors recommend opening a line of credit early, before you actually need it. “It doesn’t cost very much [to establish], and oftentimes it’s free or a very minimal cost to maintain it,” said Crystal Cox, a senior vice president at Wealthspire Advisors in Madison, Wisc. “Just because the credit line is out there does not mean you have to use it. But it’s there just in case.”

In the end, whether or not to pay off a mortgage before retirement is a complex and deeply personal choice.

To Wade Pfau, director of the Retirement Income Certified Professional program at the American College of Financial Services in King of Prussia, Pa., the decision depends partly on how a client feels about risk. A mortgage is a sure cost, or a “negative bond,” as he put it. To generate returns that are higher, mortgage holders will likely end up taking on a greater degree of uncertainty.

“The potential to earn a higher return than the mortgage interest rate will generally require accepting risk,” said Pfau. “There will rarely be a safe investment earning more than mortgage interest rates.”

Still, for some clients what matters most is whether the debt “keeps them awake at night,” said Steven Schacter, a senior vice president at Forest Hills Financial Group in Palm Beach Gardens, Fla. In the final analysis, the decision is “as much emotional as it is mathematical,” he said.