Mortgage - To Pay or Not to Pay OFF

A question we hear often is whether one should pay off their mortgage early or not. Well, as with many, if not most, financial questions we'd argue: It depends. Every situation is unique and must be evaluated on it's own merits. That said, I will say we believe many folks should consider NOT paying off the mortgage early for a variety of reasons. Below is a question posed to Don Taylor, a writer for Bankrate.com. As always, let us know if you'd like to discuss this or any other issues concerning your mortgage.

Dear Dr. Don,
I'm 61½ and retired with two pensions providing annual income of $73,000. My wife plans on working for another four years. We will draw Social Security when she retires -- I'll be 65 and she will be 62, and our benefit will total about $18,000 a year. So our pension plus Social Security will give us about $91,000 per year.

We currently have about $220,000 in savings and investments with no debt, other than a $175,000 mortgage at 4.5 percent. The home is valued at approximately $221,000.

Should we try and pay down the mortgage with the money we have in savings and investments -- held as IRAs and Roth IRAs?
-- Don Debt-Free

Dear Don,
While I think having the house paid off at retirement is, for most people, a sound financial goal, I'm also a big proponent of maintaining a measure of financial flexibility. Cashing in your retirement accounts to pay off the mortgage reduces your financial flexibility.

You didn't comment on how your wife's health insurance will be covered between age 62 and age 65, when she can enroll in Medicare. She may expect coverage from her employer, or from yours. But even if she does expect that coverage, some cash reserves are appropriate.

Even if you just took out that $175,000 mortgage, your monthly payment would be about $887 on a 30-year, fixed-rate mortgage, or $1,339 on a 15-year, fixed-rate mortgage. That's 12 percent to 18 percent of what you expect in retirement income.

The 4.5 percent you're paying on the mortgage loan costs you even less if you can use the mortgage interest deduction on your income taxes. I wouldn't rush to pay off the mortgage just because you can.