Assessing Your Mortgage Situation in Retirement
When it comes to retirement preparation, a common benchmark goal is having one’s mortgage paid off. This typically removes a large, ongoing payment from the budget and can reduce retirement expenses substantially. Some people even schedule their retirement just after their final payment date.
Here’s an even better idea: Schedule your retirement date six months to a year after your last mortgage payment, but continue to save an amount equal to that mortgage payment each month to help accumulate an emergency fund before you retire. While your house may be a key asset, it’s not exactly liquid, making it difficult to access that equity should you need money during an economic downturn or for a personal emergency. If you’d like to discuss other ideas about preparing for retirement, please contact us.
The reality is many Americans are still carrying a mortgage when they enter retirement. More than 35% of heads of household age 65 to 74 still carry a mortgage, and 23% of homeowners older than 75 are still paying down a mortgage.1
One way retirees try to offset mortgage expense is by using some of their saved assets. Be careful — large withdrawals from certain accounts could throw you into a higher tax bracket for the year. Also, reducing savings could have a significant impact on your ability to generate household income in the long-term. The last thing you want is to run out of money during the latter years of retirement.
Some may consider refinancing their existing mortgage — if interest rates are lower than their current rate — for the lower interest rate and a lower monthly payment during retirement. While this can help, it may mean that you have to keep paying your mortgage longer than your current mortgage schedule. Consider refinancing with a shorter-term loan, such as 10 or 15 years. You may have to pay a higher monthly amount, but it will be over a shorter time frame. 2 For example, a shorter-term mortgage may be ideal for someone buying a new home or downsizing while in their 50's.
Another option is doubling up your regular mortgage payment or applying an additional payment amount to your principal each month. If you can afford to do this while working, this strategy can shave thousands of dollars in interest. Not only does this enable you to save more money over time , but paying more toward your mortgage can help you build home equity faster.
You may decide at some point during retirement that you’d like to sell your current home and buy another. Many retirees believe they won’t qualify for a mortgage once they are no longer earning a paycheck. However, lenders have several methods they can use to calculate income for a retiree who is drawing from assets, a pension and/or Social Security to verify regular income.3 Lenders can “gross up” income on which taxes are not paid by as much as 25 percent when calculating qualifying income.4
Whether you are already retired or making your retirement plans, it’s important to consider your home not just as an expense, but also as an asset.
Content prepared by Kara Stefan Communications.
1 Liz Weston. USA Today. Oct. 30, 2018. “Why you should pay off your mortgage before you retire and what to do if you can't.” https://www.usatoday.com/story/money/personalfinance/retirement/2018/10/30/should-you-pay-off-mortgage-before-retirement-planning/38242907/. Accessed May 20, 2019.
2 Robert McKinley. CardTrak.com. May 13, 2019. “Mortgages and Retirement Are Not Peas and Carrots.” https://cardtrak.com/2019/05/13/retirement/mortgages-and-retirement-are-not-peas-and-carrots/. Accessed May 20, 2019.
3 Dana Anspach. The Balance. April 24, 2019. “How to Get a Mortgage Once You Are Retired.” https://www.thebalance.com/how-to-get-a-mortgage-once-you-are-retired-2388738. Accessed May 20, 2019.
4 Amy Fontinelle. Mass Mutual. Jan. 22, 2019. “How to get a mortgage during retirement.” https://blog.massmutual.com/post/how-to-get-a-mortgage-during-retirement. Accessed May 20, 2019.
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