Retiring with a mortgage

A growing number of homeowners are carrying a mortgage into retirement. According to the Federal Reserve, more than 32 percent of households headed by someone aged 65 to 74 had a mortgage on their primary residence in 2004, up from less than 19 percent in 1992.

If you expect to be carrying a mortgage after you’ve retired, it makes sense to start planning now. Here are some questions to ask yourself:

Should you pay down the mortgage?

If you have significant assets, either in a retirement account or in other investments, you may wonder if it makes sense to pay down the mortgage with your savings. The answer depends both on your anticipated financial needs after you retire and your individual comfort level with carrying debt.

Withdrawing funds from your 401(k) or other retirement accounts to pay down a mortgage is almost always unwise, since you’ll most likely be hit with a large tax bill. However, if you have money in an account earning only a modest return, it may make sense to use it to lower or eliminate your mortgage principal. For example, if your home loan carries a rate of 7.5 percent and you have funds stashed away in an investment earning 5 percent, you may be better off putting that money toward your mortgage. Remember, however, that you pay tax on the interest from your investments, while the interest you pay on your mortgage is often deductible. It’s therefore wise to consult with a financial advisor for advice on your particular situation.

How will you meet the mortgage payments?

If you expect to have a reduced income after you retire, you may be worried about being able to keep up with your mortgage payments. It may make sense to consider refinancing to obtain a lower monthly payment. Let’s say that at age 55 you took out a 30-year fixed-rate mortgage for $200,000 at 6 percent, giving you a monthly payment of $1,200. If you retire at 65, you will still have 15 years left on your mortgage, with a remaining principal of $142,000. If you’re worried that you will have difficulty making those $1,200 payments when you stop working, you might consider refinancing to a new 30-year mortgage for $142,000. At a 6 percent interest rate the payment would be just $850 a month.

The downside of this strategy is that while it may solve your monthly cash-flow problems it will take you twice as long to pay off your house and result in your paying a considerable amount of additional interest over the life of your loan. If you currently have an adjustable rate mortgage, you may want to consider refinancing to a fixed-rate loan to protect yourself from the possibility of future payment increases while you’re on a limited income.

You may also want to consider purchasing an annuity that will guarantee an income sufficient to cover your mortgage payment. An annuity is a financial product that guarantees regular payments in exchange for a lump sum upfront. If you have 20 years left on your mortgage, for instance, you might use your savings to purchase an annuity that would provide an income sufficient to cover your loan payments during those two decades. It may be possible to purchase such an annuity with funds from your 401(k) or retirement account without incurring a tax hit. Once again, it’s a good idea to ask a tax and/or financial advisor for advice.

Could you benefit from a reverse mortgage?

If you have a considerable amount of equity built up in your home, you may be able to draw cash out of your home with a reverse mortgage. This type of mortgage is similar to a home equity loan in that it enables you to borrow money using the value of your home as collateral. The difference, however, is that a reverse mortgage pays you. The loan is not due as long as the house is your principal residence. The loan and accompanying interest will be paid back out of the proceeds from the sale of your home if you decide to move, or out of your estate should you pass away.

To qualify for most reverse mortgages, you must be at least 62 years of age, live in the home, and either own the home outright or have a low mortgage balance. The exact amount you can receive will depend upon your age, the appraised value of your home and current interest rates. You can obtain more information on reverse mortgages from the U.S. Department of Housing and Urban Development. You can also start searching for reverse mortgage lenders through LendingTree.

Would you be better off downsizing?

Selling your current home and buying a less expensive one may enable you to pay down your mortgage or pay it off altogether. If your children have moved out, you may find that you do not need the space you once did. You may also discover that you do not want the hassle of maintaining a large home and property in your retirement, especially if you plan to travel.

There’s no one solution that meets the needs of everyone heading into retirement with a mortgage. But taking time to carefully assess all of your options will help ensure that you have the cash flow you need to be able to comfortably enjoy your leisure years.



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