Key takeaways
- The clean test: compare the present value of the payments you have left to the payoff amount. If the PV is lower, keeping the mortgage wins.
- In the worked example — $180,000 at 3.25% with 12 years left — the remaining payments are worth about $152,000 today, so paying it off costs roughly $28,000 of value.
- Flip the rate to 7% and the same test reverses: paying off wins by about $6,000.
- Paying off with traditional IRA money can be the deciding factor: netting $180,000 at a 24% marginal rate takes a $236,842 withdrawal, and can push more Social Security into tax and trigger an IRMAA surcharge two years later.
- The strongest non-financial argument is real: removing a payment permanently lowers required withdrawals, which directly reduces sequence-of-returns risk.
The test that actually settles it
Paying off a mortgage buys you one thing: freedom from a fixed stream of future payments. So the honest question is what that stream is worth today. If the present value of your remaining payments is less than the payoff amount, you would be overpaying to escape them.
Take a concrete case: $180,000 outstanding at 3.25% with 12 years left. Principal and interest are about $1,511 a month — $18,135 a year. Discount those 12 payments at the 6% you expect your portfolio to earn:
Payoff cost: $180,000. Keeping the mortgage is worth about $28,000.
| Mortgage rate | Annual payment | PV at 6% | Payoff cost | Verdict |
|---|---|---|---|---|
| 3.25% | $18,135 | $152,038 | $180,000 | Keep it (+$28,000) |
| 5.00% | $19,978 | $167,489 | $180,000 | Keep it (+$12,500) |
| 6.00% | $21,078 | $176,718 | $180,000 | Roughly a wash |
| 7.00% | $22,213 | $186,231 | $180,000 | Pay it off (+$6,200) |
The pattern is not a coincidence: the test tips right around where the mortgage rate crosses the discount rate. (It crosses a little above 6% here only because treating twelve monthly payments as one year-end payment understates their present value slightly.) That is the rate-versus-return rule of thumb, derived rather than asserted — and now with a dollar figure attached rather than a vague "you'd come out ahead". Use a conservative expected return; the saving from a payoff is certain, and the portfolio return is not.
Where the money comes from can outweigh everything above
A retiree rarely has $180,000 in cash lying idle. If the payoff comes out of a traditional 401(k) or IRA, every dollar is ordinary income in the year you take it:
- To net $180,000 at a 24% marginal rate you must withdraw $180,000 ÷ 0.76 = $236,842. The tax cost is $56,842, which comfortably swamps the $28,000 the present-value test was arguing about.
- A spike that size can push part of the withdrawal into a higher bracket than 24%, make more of your Social Security taxable, and cross an IRMAA threshold that raises Medicare premiums two years later.
The order of preference for payoff money is therefore the same as the general drawdown order: cash and taxable brokerage first (only the gain is taxed, often at 0% or 15%), then spread pre-tax withdrawals across several years, and leave Roth money alone. If you want the mortgage gone, retiring the balance over three or four calendar years usually beats doing it in one.
What a paid-off house genuinely buys
The financial test above is not the whole answer, because a mortgage payment is not just a cost — it is a rigid cost. Removing $18,135 a year of obligatory spending changes the shape of the plan:
- Lower withdrawals, lower sequence risk. A household spending $70,000 from a $1.4m portfolio is at 5%. Remove the mortgage and it is $51,865, or 3.7% — the same portfolio, a materially safer plan. This is a direct reduction in sequence-of-returns risk, because you are no longer forced to sell as much in a bad year.
- Lower taxable income. Smaller withdrawals mean lower AGI, which ripples into Social Security taxation, IRMAA, and how much room you have for cheap Roth conversions.
- Resilience. A household with no mortgage can cut spending far more deeply in a crisis than one with a payment due on the first of the month.
And the deduction? Mostly gone
"Keep the mortgage for the tax deduction" is dated advice. Mortgage interest is only deductible if you itemize, and the standard deduction is now large enough that most households — especially retirees with no state income tax on Social Security and a small mortgage balance late in the term — take the standard deduction instead. If you are not itemizing, your mortgage interest provides no tax benefit at all, and the after-tax cost of the loan is simply its rate.
Putting it together
- Low rate, taxable money required, plenty of liquidity: keep the mortgage and invest the difference.
- High rate relative to what you expect to earn: pay it off — the arithmetic and the peace of mind agree.
- Only pre-tax money available: do not do it in one year. Spread it, or make extra principal payments from cash flow instead.
- Close to the line, and the payment is a large share of spending: lean toward paying it off. The risk reduction is worth more than a small expected-return edge.
The mortgage payoff calculator shows the interest saved and the date the balance hits zero under extra payments, and the retirement drawdown calculator shows what removing the payment does to how long your portfolio lasts.
Frequently asked questions
Should I use my 401(k) to pay off my mortgage?
Rarely in a single year. Every dollar leaving a traditional 401(k) is ordinary income, so netting $180,000 at a 24% marginal rate takes a $236,842 withdrawal and roughly $57,000 of tax, plus knock-on effects on Social Security taxation and Medicare premiums two years later.
Is it better to pay off the mortgage or invest?
Compare the present value of your remaining payments to the payoff amount using your expected return as the discount rate. The test tips wherever the mortgage rate crosses your expected return — but use a conservative return, because the interest saving is certain and the return is not.
Does paying off my mortgage reduce the amount I need to retire?
Yes, substantially, but only for the years the payment would have run. Removing $18,000 a year of spending lowers your required withdrawal immediately, which lowers your withdrawal rate and reduces sequence-of-returns risk for the rest of the plan.
Is the mortgage interest deduction a reason to keep the loan?
Usually not any more. Interest is only deductible if you itemize, and the standard deduction is large enough that most retirees do not. If you take the standard deduction, your mortgage interest gives you no tax benefit and the loan simply costs its stated rate.
What if I can only pay off part of the mortgage?
Partial payments are fine and often better. Recasting or making extra principal payments from cash flow reduces the balance without a single large taxable withdrawal, and you keep the liquidity that a full payoff would have locked into the house.
See the payoff inside a full plan
Planomy models the mortgage, the withdrawal that would clear it and the tax it triggers in one projection — so you can compare paying it off, spreading it, or keeping it, on the same screen. Free, private, and running in your browser.