For many of us, the mortgage debt is the largest in our budgets. That is why entering retirement debt-free seems ideal for many people.
Getting rid of a big debt could save you thousands of dollars in interest and free up money you can add to your retirement savings or just reduce your expenses in retirement.
It is my dream to pay off our mortgage before we retire. But I do not think it is possible. And I am not alone. According to stats, more and more people retire owing money on their homes. The Federal Reserve’s Survey of Consumer Finances showed that 37.6% of households of people aged 65 to 74 had a mortgage in 2019.
We all know that it can take decades to pay off your mortgage. But does it always make sense to pay off a mortgage before you retire?
Reasons to consider paying off your mortgage before retirement.
There are many reasons to consider when deciding should I pay off my mortgage before retirement or not:
- You may be able to retire sooner.
- You will have one less bill to pay each month in retirement.
- It will provide you with more income in retirement.
- Paying off a mortgage before retirement can reduce stress.
Also, it makes sense to pay off a mortgage before retirement:
- If the house is worth more than the mortgage balance.
- If the interest rate on your mortgage is higher than the rate of return on your investments.
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Benefits of paying off your mortgage before retirement.
Most people would be better off not having a mortgage in retirement. Getting into retirement with an unpaid mortgage will put a burden on your lifestyle.
When you are working, you have years of earned income to pay off a mortgage. But once you retire, you will be living on a fixed income. And when you start living on a fixed income, it is hard to pay off debt if you need to pull big chunks of money from your savings. Although, large withdrawals from retirement funds could push you into a higher tax bracket.
Frankly, it will make your retirement life a lot harder if you must continue to pay a mortgage when you are not working. In addition to that, you still have to spend money on property taxes, homeowner’s insurance, maintenance, and repairs.
The simple fact that you have lower housing costs means you will need less income to cover this essential expense. Also, you will have more retirement income left for other retirement expenses.
Being debt-free gives you more freedom and money left in your pocket to enjoy your golden years than struggling to pay off the mortgage.
Roman and I refinanced our house many times. But even with a low-interest rate of 2.5 percent, the mortgage payments take the biggest chunk of our budget.
Here is a list of benefits of paying off your mortgage before you retire:
- Give you peace of mind
- Provide you a place to live without worrying about monthly payments
- Reduce your retirement expenses
- Saving you money on interest
How to pay off your mortgage before retirement:
Refinance to a shorter-term loan. One way to pay off your mortgage faster is to refinance to a shorter loan term. For example, you can apply for refinancing your mortgage from a 30-year to a 15-year loan. That can put you on the fast track to paying off your mortgage.
However, it is important to remember that a shorter-term loan means higher monthly payments. Make sure your budget can handle the higher payments each month.
Refinance to a lower interest rate. Another smart option to reduce your mortgage debt is refinance it at a lower rate. In 2020 Roman and I refinanced our mortgage with Ameri Save Mortgage Corporation at 2.5 percent. It helps us bring down our monthly payments and save up to $500 a month.
Make an extra payment each month or each quarter. Look at your mortgage balance and figure out how much extra you can put toward your mortgage each month. Those extra payments can reduce your principal balance significantly.
Making an extra payment 4 times in one year could remove 10 years from your payoff date.
Every dollar you pay above your regular monthly payment helps speed up your payoff date. It does not mean that you have to start doubling up your monthly payments. Simply adding an extra $100 a month to the principal can speed up your payoff date for 5 years.
Switch to bi-weekly payments. Also, instead of sticking with the traditional monthly payments, you can start making bi-weekly mortgage payments.
When you switch to a bi-weekly mortgage payments program, you split your payment in half and pay twice each month. There are 52 weeks in a year. If you switch to bi-weekly payments, you end up making 26 payments which are equal to 13 monthly mortgage payments – one extra payment yearly.
With this strategy, you will be able to knock off a few years of your mortgage balance and reduce the amount of interest you pay on the loan.
Put extra cash towards your mortgage. Whether it’s a bonus, tax refund, salary raise, or inheritance, put every dollar towards paying down your mortgage debt.
Reasons not to pay off your mortgage before you retire.
Rushing to pay off your mortgage before retirement may not be a good idea for many reasons:
- Paying off your mortgage early could trigger a penalty
- You may be better off investing the money
- You may need to borrow against your home equity later
- You will be paying off your mortgage with savings
Tax benefits. Your mortgage interest is tax-deductible.
If you are still working and in the 35% tax bracket, every dollar you pay in mortgage interest saves you 35 cents in federal income taxes. Also, you save money on state income taxes.
A mortgage is a low-cost debt. A mortgage is one of the least expensive loans available.
If you have a credit card debt, it often comes with a higher interest rate than a mortgage. Do not rush to pay off a 2.5 or even 3.5% mortgage if you have credit card loans or other debt you are still paying off at 18 or 20% rates.
It is better to save for retirement than pay off a mortgage. As I mentioned above, mortgages are often the cheapest money you will ever be able to borrow.
Typically, mortgages have a lower rate and even fixed-rate, helping to ensure that borrowed money remains cheap for the next 15 or 30 years. That means people have the opportunity to put funds elsewhere, such as in savings and retirement accounts.
Thanks to compound interest, a dollar you save and invest today has more value than a dollar you invest 5 or 10 years from now. That is because your invested money will be earning interest on top of interest for a long time. For that reason, it makes more sense to start saving for retirement when you are younger rather than focus on paying off your mortgage.
What to do if you cannot pay off your mortgage before retirement?
Unfortunately, not everyone can pay off a mortgage. Retiring with mortgage debt is becoming a more common scenario.
To pay off a mortgage before retirement might not be realistic for everyone. If you are like me and worry about how to afford mortgage payments in retirement, there are several options to consider:
Downsizing. Your home is one of the biggest investments.
If you have been living there for a long time, your home went up in price and accumulated a lot of equity. One of the ways to get rid of mortgage payments and home maintenance bills is to sell the house.
If you cannot afford to pay off your mortgage, you might consider selling your home. You can sell the big house and trade it down for a smaller house or a condo. Or you can move to a cheaper area and pay cash for your new house.
Invest equity. Do you want to deal with the hassle of homeownership in retirement?
Maybe you rather spend time traveling and visiting family and friends. In this case, your option will be to sell your home, invest cash, and enjoy living on rent and mortgage-free.
Investing the cash from home sales will bring you additional income in retirement. If you let it grow for 10 years in your investment portfolio, and it might be enough to pay cash for your next house or a condo if you are tired of renting.
But many people would prefer to stay in their homes and retire in place. They want to remain in their neighborhood for life.
In this case, homeownership might provide several options to fund your retirement without the risk of stock market investments.
In this case, consider a reverse mortgage. Those people who have big equity built up in their homes could apply for a reverse mortgage. This type of loan can be also used to pay off the existing mortgage.
A reverse mortgage is also known as a home equity conversation mortgage (HECM). It provides income to retirees and does not require monthly payments. You still have to pay taxes and home insurance, and you will be responsible for maintenance.
The best part is that you will receive a portion of your home equity in cash without requiring you to move out. But the loan has to be repaid when the owner sells the house, moves out, or dies.
A reverse mortgage can be flexible, and you can take HECM as a line of credit (HELOC), lump sum, or annuity.
One option is to use HECM for your medical or long-term care expenses late in life when you run out of money.
Another option is to set up an annuity to increase Social Security and any other retirement income you will receive.
However, reverse mortgages can be complicated. There are many terms and conditions, and it is a relatively expensive way to borrow money. So, make sure to do your research to understand all the pros and cons, and talk to a loan specialist.
Should you pay off your mortgage before retirement if you could? Share your thoughts in the comments below.
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