Homeowners approaching retirement when their incomes will drop, who still have a mortgage and also have some free cash, can pay down the balance and refinance, pay down the balance and modify the loan, or sit tight and invest. Which course of action depends is best depends on the specifics of the case.

Your free assets make it possible to eliminate your insecurity about a payment you can’t afford. The issue is how best to use those assets.

Paying Down the Balance and Refinancing

Using your free assets to pay down the balance of your existing mortgage would shorten the term but not reduce the payment. You would have to refinance to get the payment down, which would mean replacing your 4.75% rate with a current market rate of at least 6%. That is inadvisable. You may have to give up the 4.75% rate when you retire, but there is no point in giving it up now.

Paying Down the Balance and Modifying the Loan

Some lenders, for a fee, will modify a loan contract. Because the rate on your mortgage is so low, it would be in the lender’s interest to have the balance paid down, even if not completely. Assuming the lender is willing, you use your free assets to pay down the balance, then modify the contract based on the new balance. This would allow you to retain the 4.75% rate on half of your loan.

If you pay off half the balance and the rate and term remain the same, the payment would fall by half as well. This would give you the peace of mind you are looking for.

However, there can be no assurance that the lender will be willing or able to modify the loan. Your mortgage could be sitting in a pool of mortgages that are the collateral for a mortgage security, in which case a modification would not be possible. Without the modification, there would be little point in paying down the balance.

Furthermore, it is probably a mistake to pay off any part of a 4.75% debt when risk-free investments are available at yields higher than that. Repaying debt is an investment that yields the interest rate on the debt. Since you can currently buy an insured 7-year certificate of deposit (CD) yielding at least 5.25%, you will be better off when you retire if you buy the CD rather than pay down the mortgage balance.

Sit Tight and Invest

I would use the spare cash to buy a CD that will mature about the time you retire. At that point you take stock of the market to plan your next move. If you can continue to earn more than 4.75%, you remain invested. On the other hand, if rates have come down to the point where you can no longer invest at a yield above 4.75%, you liquidate the CD, pay down the mortgage balance and refinance it to lower the payment.

The old maxim that you should have your mortgage paid off when you retire had a lot of merit for people whose wealth was largely in their home. For people with significant amounts of financial assets, however, the maxim needs revision. What matters is not the mortgage balance alone, but the balance relative to financial assets. Retiring with a $200,000 mortgage balance and $400,000 of financial assets is preferable to retiring with no mortgage and no assets.