Ready to retire but still making mortgage payments? Here's some advice on how to cope.
Retirement and Mortgage Payments: Not Necessarily an Impossible Combination
The goal of living debt-free after paying off a 30-year old mortgage may be a reality for some Americans, but many people retire from work before they have retired their debts. The Federal Reserve 2007 Consumer Finance Survey revealed more than 42% of homeowners age 65 to 74 are carrying a mortgage, up from 32% in 2004 and from just 19% in 1992.
Should You Pay Off the Debt?
Every financial situation is unique. Homeowners nearing retirement should consider the ramifications of all their options, but, in most cases, withdrawing money from a 401(k) or other retirement account to pay off your mortgage is a bad idea. A large or early withdrawal of those funds can trigger an expensive tax bill. And losing 33% of your money right off the top (depending on your tax bracket) to save 6% on your mortgage doesn't make sense. A smarter move might be using that retirement money to slowly make principal reduction payments, adding an extra payment here and there if possible to retire the debt faster. Another option is purchasing an annuity which guarantees an income to cover the payments for the remaining years of the loan. As long as you buy the annuity by directly rolling-over the retirement money to the annuity company, there won't be a tax bill.
Retirees with significant savings which can be tapped without a tax penalty may want to calculate their earnings on that investment compared with the interest they are paying on the debt. It may be wiser to pay off a mortgage with a 7% interest rate than earn 2% on your savings.
Is Refinancing an Option?
Dropping home values have made refinancing a difficult proposition for many consumers. But for seniors who have significant equity in a home, refinancing at today's low interest rates could be a good option. Making the mortgage payment as low as possible is almost always a good idea for retirees.
In addition to a standard mortgage refinance, another option to consider is a reverse mortgage. Available only to homeowners age 62 and above, reverse mortgages allow the homeowners to access the equity in their home and receive a lump sum payment, a line of credit, or monthly income. Reverse mortgages are available even for homeowners with some mortgage debt.
One more option to consider, depending on the value of your home and the amount of the mortgage, is to sell and move into a less expensive home. Even though the property may not be worth as much as it was a few years ago, owners with equity might want to sell and take advantage of today's lower prices and low interest rates to improve their cash flow.
Evaluating various options can go a long way to protect your home equity and improve your retirement lifestyle.
Michele Lerner is a freelance writer with twenty years of experience writing articles and web content for newspapers and magazines on topics related to real estate, personal finance and business. Her clients include The Washington Times, Bankrate.com, Urban Land Magazine, NAREIT's Real Estate Portfolio and numerous Realtor association publications. Michele's first book, "HOMEBUYING: Tough Times, First Time, Any Time" is available now from Capital Books. Michele has a B.A. and an M.A. in International Affairs from George Washington University in Washington, D.C.