Should you pay off your mortgage when you retire? That’s a tough decision that many people face. Lots of people think that no mortgage at retirement is the way to go. Unfortunately that s not true for everyone. Having a mortgage can lower your tax, increase your cash flow, and diversify your assets. Most retirees will be living on a majority of fixed income so not having debt can be very attractive. But consider these 5 factors before you make that important decision:
1) If you are still able to write off the interest on the loan, then I would recommend that you keep the mortgage because you still get the tax advantage of the interest deduction. If you are in a high tax bracket at retirement, this would be a savvy move. The higher the interest deduction, the higher the tax advantage.
2) If you don t have enough interest deductions to itemize on your taxes then pay off the balance if you have the money to do so and only if those funds are making less than your mortgage interest. For example, if your cash to pay off the mortgage is making 4 and your fixed rate mortgage is 7 , then pay off the balance with the cash. You are basically investing more money in your home.
3) Even though your mortgage is paid off, it is a good idea to make a monthly payment into cash reserves set aside especially for maintenance on your home. Just because the mortgage is paid off doesn t mean you can let that large investment sit without repairs. Too many seniors sit alone in large homes in disrepair. Don’t let this happen to you.
4) A common mistake is for retirees to refinance a high interest fixed loan for a lower interest fixed loan. When you refinance, the interest and principal is amortized over the life of the loan and in the beginning you will be paying mainly interest. But if you had your loan for over half of its life, then you are paying down principal not interest which is a good place to be when you are on a fixed income.
5) You don t want all your eggs in one basket, so why own a home with no mortgage? If you do, your largest asset may be your home and if it goes down in value, then most of your net worth will too.
Some people consider their home as their investment, and have no problems selling it to turn equity into cash and downsize to a smaller home. Other people feel attached to the home that they raised their kids in and want to stay for the long haul. Most baby boomers are heading into retirement with large mortgages and have no intention of paying them off.
Your individual circumstance will tell if it is the right thing to pay off a mortgage before you retire. By understanding the tax implications of your decision and how it affects your cash flow and your portfolio, you will feel better about making the right decision for you.
Interested in more tips to survive this crisis? Get the Whole-Hearted-Way eNewsletter written by Fern Alix LaRocca, a fee-only Certified Financial Planner TM with over 24 years in the industry at http://www.wholeheartedway.com.
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