Should I Pay Off My Mortgage By The Time I Retire?
More Americans are heading into their retirement years with mortgage payments – and the amounts of those payments are on the rise.
But depending on circumstances, that may not be a bad thing.
Christopher Mayer, A Columbia Business School Professor of Real Estate, Finance, and Economics, says the inflation-adjusted mortgage debt for homeowners ages 60 to 65 has more than tripled, from less than $30,000 to about $100,000, between 1992 an 2010.
“When we updated our data through 2013, the higher amounts remained steady,” Mayer said. “The share of homeowners in this age group who do not have a mortgage has fallen to about 45 percent. That compares to 55 percent a decade ago. These are tough numbers for retirees to overcome.”
The recession is certainly a factor. Many Baby Boomers were forced to delay retirement when the economic downturn wiped out their savings. Add to that mix unexpected expenses, layoffs, credit card bills and college loans for their kids, and it’s easy to see why many are being forced to work longer, downsize, or rely on borrowing against their home’s equity to meet their monthly payments.
According to the most recent data from the Consumer Finance Protection Bureau (CFPB), three times as many older homeowners were leaving the workplace still owing a monthly mortgage in 2011 compared to 2001. And in 2011, 6.1 million homeowners 65 and older were paying monthly mortgages, up from 3.8 million in the same age group during the same period.
But should you make it your goal to have your mortgage paid off by the time you retire?
It depends, according to Peter Karp, President of Karp Capital Management, a San Francisco investment firm affiliated with Finet Mortgage. “If you are projected to generate a significant amount of taxable income after you retire, it may be preferable to keep some tax-deductible mortgage debt. Instead of drawing down your assets to pay off your home, you can leverage your mortgage for its tax advantages. Your home is an investment, and it’s important to evaluate how it fits into your longer-term financial goals”.
Karp added “Property investments should be positioned to generate income after retirement, not put a strain on your financial budget. Purchasing a home is not only about figuring out what you can afford, but how long you can afford it.”
If retiring mortgage debt is the goal, these are strategies that should be considered:
1. Make sure your interest rate is as low as possible. The less you have to pay to interest, the more that can go to principal.
2. Consider a shorter term, such as a 15-year mortgage. The payment is higher, but the rate is lower and a lot more of your payment goes to principal each month.
3. Make an extra payment once a year. This effectively cuts your payoff time on a 30-year loan to about 23 years. (Don’t fall for internet ads offering plans to pay off your loan faster. You can do it yourself).
4. Throw a little more into each monthly payment. A $400,000 30-year loan at 4% would pay off in 23 years if you threw in an extra $300 per month. Put in $500 per month and it’s gone in 20.25 years.
If you’re planning for retirement, the mortgage experts at Finet, and the financial experts at Karp Capital Management can help you determine the best method, and indeed the advisability of retiring mortgage debt. And if refinancing will help lower your rate, it may be easier while you’re still working. Even those with substantial retirement nest eggs sometimes have difficulty when they no longer have a monthly salary. Former Fed Chairman Ben Bernanke famously couldn’t refinance his home loan after he retired.