Key Takeaways
- Extra mortgage payments can starve your retirement accounts.
- Pouring too much cash into home equity can leave you “house-rich, cash-poor.”
- If your mortgage’s interest rate is under about 6%, you might want to leave the payoff schedule alone and invest your extra funds into the market.
Paying off your mortgage early sounds like the responsible move. Often, it can be the expensive one.
Almost half of U.S. families don’t have a retirement account at all. Among those who do, the median balance is around $86,900, enough to cover about four years of average household expenses and little more.
When you throw every spare dollar at the mortgage instead of funding your retirement, you might enter retirement with little beyond Social Security and a home you’re reluctant to sell. You might win the house but lose the lifestyle you wanted it for.
‘House-Rich, Cash-Poor’
Home equity looks great on a net worth statement, but you can’t use it easily for buying the things you need. If most of your wealth is locked in your home when an emergency hits, cash is what you’ll wish you had.
A National Institute on Retirement Security analysis found that American workers have saved just 4% of what retirement guidelines recommend in their 401(k)s and IRAs. But count the value of their homes, and they’re at 41%.
Many Americans are also housing cost-burdened. In 2024, 33% of U.S. households spent more than 30% of income on housing, and 16% spent more than half. And 40% of retirees leave the workforce earlier than planned, typically due to health problems or company changes.
Important
If your mortgage’s interest rate is lower than 6%—that is, lower than what you could earn by investing it—you might want to leave it on a normal payoff schedule, and put those extra funds in the market.
When Paying Off Early Makes Sense
When paying off your mortgage early might make sense:
- Your mortgage rate is 6% or higher and you’d rather lock in a risk-free “return.”
- You’re close to retirement with solid savings and want to shrink your monthly fixed costs.
- You’ve already maxed out your retirement contributions and have a healthy emergency fund (the typical recommendation is to save three to six months of living expenses).
- The psychological relief of being debt-free outweighs the math—as long as it doesn’t leave you short on liquid savings.
Paying Everything in the Right Order
For most people, the answer is a sequence of priorities:
- Capture any employer retirement match before making a single extra mortgage payment.
- Build a cash cushion (an emergency fund) that can handle a job loss or a large medical bill.
- Rank your debts by interest rate, highest to lowest. Pay the highest-rate debt first—typically credit cards.
- Your mortgage will likely rank in the middle or near the bottom, depending on when you bought or refinanced. Once you’ve cleared the higher-rate debts, start making extra mortgage payments. Aim to finish your mortgage closer to your planned retirement date, not necessarily decades early.