When you retire, should your mortgage retire, too?
By Linda Pescatore
Copley News Service
If you're on the verge of retirement, you may be trying to clear your debts to lower your living expenses and achieve some financial peace of mind.
But what about your mortgage? Assuming you have the means, should you pay it off to own your home free and clear, or might it be better to keep the payments and the tax deduction? If it's already paid off, should you borrow against it?
"The short answer is, 'It depends,'" says Leon James, senior financial adviser and a certified retirement financial adviser with Anchor Capital Management Group, of Irvine, Calif. "Generally, if they don't have their house paid off by the time they retire, then it's not generally a good idea. Because most likely the money that they've saved that would pay off the house is the money they're going to need to live on for the rest of their lives, especially with the expanding life expectancy."
It's always an advantage if you pay your house off at an earlier age, James says.
"You're never going to go wrong with that, because now you've got a bunch of options. One is that if you need some cash, you can pull it out. If you're 62 or older, you can do a reverse mortgage.
"If your house is free and clear, you can generate some income from that - and that's not taxable because it's considered a loan - so you have an asset that's semiliquid. So paying off your house is always a good strategy. But if it's done at the expense of contributing to your 401(k) or your IRA over the years, I would have to question that," James says.
If you're thinking of pulling cash out of your home, you may be tempted to take a loan with a shorter term, such as five or 10 years. Although short-term mortgages usually come with lower rates, the monthly payments will be higher, so it might be to your advantage to apply for a 30-year mortgage, according to James.
The thought of having a mortgage in your 80s or 90s may not sound appealing, but he isn't recommending you keep the loan that long. In fact, he recommends that you regularly make additional payments to pay the loan off early. Most mortgages are structured so any extra payments go directly toward principal.
"You want to always have the option of having the lower payment. Every month that payment is due, but in the months when you're flush, you can throw an extra thousand dollars at it," he explains. "If you have the discipline to do that, I would do the 30-year. If you don't, you might want to look at a shorter term, with a higher payment."
If you've placed your home in a trust, refinancing can be tricky, but is still doable.
"You have to change the title back to your own name, or husband and wife, because the lenders won't lend to a property owned by a trust. You pull it out, get the loan and then put it back in," James says.
The tax benefits of keeping your mortgage may be diminished by the time you're near retirement. Because of the way most mortgages are amortized, with the bulk of the payment going toward interest in the early years, your mortgage interest deduction will diminish progressively in the final years. Although every little bit helps during the peak earning years before retirement, a tax deduction may become less important after retirement, when earnings often decline.
One area you don't want to scrimp on is homeowners insurance. When there's no lender requiring you to carry a policy, you may be tempted to cut back. Experts agree that's a bad idea. After all, the more equity you have, the more you stand to lose.
"Maintaining the proper coverage amount is important whether or not you have a mortgage," says Alan Schlosberg, product property manager for Liberty Mutual Insurance. "(Your) coverage amount is determined by a number of factors, including square footage and construction type. ... If you are willing to take on more insurance risk, then increasing your deductible is a better way than reducing coverage to save money on your homeowners insurance."
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