Why Homeowners in Their 30s Shouldn’t Worry About Paying Off the Mortgage

pay off mortgage early

Homeowners in their late 20s and 30s might feel torn about which life goal to pursue first: paying off their mortgages or saving up for retirement. Some advisors say paying off a home loan should take precedence so that workers can retire without carrying mortgage debt — often their largest monthly payment — into their fixed-income years.

Other experts say saving for retirement should be younger homeowners’ top priority if they can’t save for both goals. Consider these five reasons why young adults should save for retirement first.

Related: 28 Retirement Mistakes People Make

1. Your Time Horizon

While being debt-free is appealing, it might not be a wise financial move. Homeowners might be in a high tax bracket when they retire, so paying off the mortgage would disqualify them from claiming a mortgage interest deduction, which can range from a few hundred dollars to several thousand dollars a year. Another disadvantage: If homeowners pay off their mortgage and the house falls in value, they could end up losing money.

That doesn’t mean homeowners should give up on paying down their mortgage quicker by, say, making extra payments. But a better decision is to focus on stashing more money into a retirement savings account over the long run.

A person who pays $10,000 a year into a 401k with an average 8 percent rate of return will have a higher nest egg balance over 15 years compared with an individual who puts the same amount of money toward a mortgage with a lower interest rate over the same period, Bob Lotich of Christian Personal Finance said in a blog post. By saving for retirement, the funds have more time to build value at a higher return.

“It is more important to get as early a start as possible, so that the savings can compound and grow,” says Carol Berger, a certified financial planner. “If a 401k is available, a minimum of 10 percent should be contributed if at all possible. People in their 30s will have time to work on paying off the loan later on, hopefully when income has increased along with discretionary spending.”

2. Diversification in Retirement Plans

Your house is a great asset that appreciates in value and builds equity over time. But it’s still just one singular asset. If your money is tied up in a house that plummets in value, you’re stuck. A retirement portfolio, on the other hand, provides you with the opportunity to diversify your investments with stocks, bonds and other assets, and possibly with higher returns.

Wealth manager Tom Anderson also noted that a home isn’t as liquid as it might seem as far as leveraging equity for cash. “It definitely makes sense to have that home equity line of credit in place, but you may need more liquidity than that,” he told The Washington Post. “And if we think about 2008 … many home equity lines of credit were canceled or reduced. Nothing buffers you like having money in the bank.”

Keep Reading: How to Properly Diversify Your IRA Account

3. Your Retirement Participation Match

As you save for retirement, don’t pass up the opportunity to participate enough in a 401k so that you get the employer match. Financial guru Dave Ramsey’s rule of thumb is to invest 15 percent of your income toward retirement before you work toward paying off your mortgage. Say you take that 15 percent each month and put it into your workplace retirement program. Matching contributions can multiply your finances more quickly than paying down your home loan.

If your employer matches 50 cents for every $1 you contribute up to 5 percent of your pay, then you earn a 50 percent return on the first 5 percent of your contributions without taking any risk in the stock market.

Related: What to Do When Your Job Offers an Awful Retirement Plan

4. Tax-Advantaged Retirement Savings

Your mortgage payments are tax deductible, and some of your retirement investments are tax deferred, so which is better? Over 30 years, retirement wins. You lose your mortgage interest tax deduction once your loan is paid off. With a 401k or IRA, taxes are deferred every year you contribute until you withdraw funds in retirement. Pay off your mortgage 10 years’ early, for example, and that’s a decade of zero tax benefits.

5. Live Comfortably in Retirement

Mortgages are self-amortizing, so provided you make your minimum payments, your home loan will be paid off eventually. If you devote your 30s and your 40s paying off your mortgage, Lotich said, you’ll be spending the next two decades scrambling to save for retirement. Without adequate savings in your 60s, you might need to put off retiring or live a paired-down lifestyle.

“Paying off your mortgage will mean that you’ll have more equity for the purchase of your cheaper retirement homestead,” said Lotich. “But since the new home will be less expensive, paying off the mortgage completely could prove to be mostly unnecessary.”

Homeowners in their 30s might want to consider a mortgage refinance at some point to snag a lower interest rate, which means that the money you save each month can go toward your loan principal — without affecting your retirement savings contributions.