The Answer to This Question is just Like Virtually All Others in Financial Planning. It depends. I have heard individuals say, "absolutely not! It's the only write off still available to the average person. This is probably the worst argument for keeping a mortgage since, even if you are in a high bracket, you are are spending a dollar to save 35 or so cents. I have heard others say, "Pay it off. You will always be able to keep your house no matter what happens." Sounds good, but probably not true in all cases since there are other expenses such as property tax, insurance and maintenance that can make a home unaffordable even if paid for.
The Right Decision Will Depend on the Answer to Several Questions.
1. Do You Have Sufficient Liquid Assets To Pay Off The Mortgage? By liquid assets, I mean assets that you can conveniently convert to cash. Bank Deposits and CD's come to mind. Selling stocks, bonds, or mutual funds, is another possibility providing you don't incur huge tax obligations. If your tax bracket is around 30%, you will have to withdraw $285,000 from your IRA to get enough funds to repay a $200,000 mortgage. probably not a good deal.
2. Will you Have Sufficient Liquidity After Paying off Your Mortgage? Even if you are only earning a pittance on your savings, it is best not to draw it down too low in order to pay off your mortgage. This may leave you with no funds for major purchases such as car repair, etc. Cars can be a major expense and it makes no sense to pay off your deductible interest home mortgage only to run up additional non-deductible debt to repair or purchase an automobile. I have recommended home equity lines of credit for liquidity purposes when paying off a mortgage. These sometimes work well; however, the major drawback is that these lines are often over used. Again, it does no good to repay your fixed-rate first mortgage debt and then replace it with variable rate home equity lines.
3. What Are You Earning On Your Savings/Investments? One of the most important questions to ask yourself is what you are earning on your investment accounts. If you are confining your investments to insured savings instruments, then it is highly unlikely that you will ever earn enough on those to justify holding a mortgage. After all, one of the major arguments for having a mortgage is that you can earn more on your investments than you pay on your mortgage. There are market conditions in which it is possible to earn more on your investments than the interest on home mortgages but it is rarely, if ever possible, to do so with anything approaching the same risk.
4. Storms Rule: Pay off Soon After Retirement or Not at All. What I mean by this is that, even if your loan has a short time left, you get little benefit from high principal payments towards the end of your life. Look at the following example: A 65 year old couple has a $95,000 mortgage with 14 years remaining. The Interest rate is a reasonable 6% and payments are $837 per month. Paying off the loan now will have big benefits in that it adds an additional $847 per month. If you can repay it now, that's fine but if you can't, it makes no sense to hold it, or even worse, add $150 per month in extra principal. The extra principal payment cuts the loan down to 11 years from 14. Big deal, you will be 76 years old when your home is paid off and you have sacrificed $987 per month during the most enjoyable years of your retirement to do so. You may think this recommendation is crazy but, if you can't get the benefit of the extra cash flow by paying it off soon, a better option is to refinance the mortgage to a 30-year term even if you have to pay 6.25% on your new loan compared to 6% on the old one. Payments on the new loan are $584 per month, a savings of $252 over the old loan. Over a years time, the extra $3000 will pay for a nice vacation at a time when you are young enough to enjoy it.
Mortgage Decisions are Complex. Too often, people make decisions based on rules of thumb or "common sense". Making the wrong decision can have huge implications on your retirement comfort and security. Make sure you understand all the implications before you make a major move. Your best friend in making these decisions is a financial calculator, not some rule of thumb offered by a financial writer who knows nothing about your particular situation.
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