How to Retire Without the Burden of a Mortgage
More Americans are retiring with a mortgage.
A study by Harvard University’s Joint Center for Housing Studies concluded that 46% of homeowners from ages 65 to 79 are still making mortgage payments. In contrast, three decades ago only 24% of this subset of Americans hadn’t paid off their house.
Retiring without a mortgage can provide more financial security for retirees – and for many Americans, it’s a goal worth realizing.
Here are four tips to help you retire without a mortgage:
1. Make extra principal payments.
Finding ways to kick in extra money toward your mortgage payment every month or periodically can make a considerable difference in how much interest you ultimately pay before owning your home outright.
Here is an example:
Taking out a $500,000 mortgage with a 5% interest rate over 30 years pencils out to monthly payments of roughly $2,700. This would lead the borrower to ultimately pay $466,000 in interest over 30 years. If the mortgage holder paid an extra $275 a month to principal, that would shave off approximately $100,000 in interest and the loan would be paid off five years earlier.
2. Pay bi-weekly.
Making bi-weekly instead of monthly payments can reduce the term of a 30-year mortgage to about 25 years. With bi-weekly payments, you pay half the mortgage every two weeks. That works out to 26 payments in a year which equals 13 monthly payments rather than 12.
3. Take advantage when interest rates are lower.
You can reduce your monthly payment if you refinance when market interest rates are lower and there is equity in your home. What you want to be careful about, however, is extending the time period of the mortgage. To eliminate your mortgage early when refinancing, consider selecting a shorter loan period. Let’s say you have 20 years left on a 30-year-old mortgage. You’ll ultimately save yourself money if you capture a lower interest rate and select a 15-year mortgage. Be sure to consider the total expenses (lender fees, closing costs, etc.) when exploring refinancing options.
4. Downsize your home.
Some people anticipating retirement decide that they don’t need all the extra room in their homes – and potentially extra expenses - after their children are launched. Moving to a smaller home can mean that you can pay for the new place in cash. No more mortgage.
Even those who successfully payoff their mortgage before retiring face ongoing home expenses that do not go away (property taxes, utilities, ongoing maintenance, etc.). It is important for current and future homeowners to know all the potential costs of owning a home – before and after the mortgage is paid off.
If you need a wealth advisor to partner with to discuss your retirement and mortage goals, feel free to contact us to speak with one of our experienced advisors: (858) 509-9500.