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Should I Carry a Mortgage into Retirement?

Should I Make a Mortgage Part of My Retirement Plan?

Retirement, it’s so close you can touch it. You’ve probably got everything planned out from seeing your grandkids more often to trips abroad. The lingering question is: "What do I do with my mortgage?" If you're mulling whether to make a mortgage part of your retirement plan, here are some considerations to help you decide one way or the other.

When to Pay Off a Mortgage Before Retirement

Hopefully, your retirement comes with complete home equity. That said, rushing to pay off your mortgage isn’t necessarily the best move for your bank account. It can deplete your cash savings and strain your financial flexibility.

Here are four situations where its better focus on slowly but surely chipping away at your mortgage.

YOUR INVESTMENTS EARN A BETTER RATE THAN YOUR MORTGAGE

Now is the time to have an honest look at your finances. That includes calculating the annual returns on your 401k, stocks, pension, and other investments. If your investments have a higher return rate than your mortgage, you should keep making monthly payments.

For example, the average 15-year fixed mortgage rate at United is 2.5 percent. If your investments earn more than 2.5 percent per year, you should stay the course. If you're unsure how to calculate your investment returns, let a United financial advisor do it for you.

YOU HAVE OTHER HIGH-INTEREST DEBTS

Consider prioritizing high-interest debts before your mortgage. Mortgages have a relatively low-interest rate of two to five percent, while the average credit card interest rate is 19.02 percent. Paying off the higher interest debt will help save you money in the long run.

Figuring out which debts to pay off is confusing. One solution is debt consolidation, which rolls all your high-interest debts into a single payment. You can also download Tally, an app that helps you pay off your cards and rewards you when you save.

YOU QUALIFY A TAX DEDUCTION

Taxes should factor in any financial decision. The 2017 Tax Cuts and Jobs Act raised the standard deduction so fewer people can deduct their mortgage interest during tax season. Additionally, you can’t itemize if you don’t have enough deductions.

You may earn a tax deduction elsewhere. For example, if you’re in the 24 percent tax bracket and put $6,000 into your retirement account, you’ll reduce your tax bill by $1,440. While paying off your mortgage is emotionally satisfying, you'll come out ahead if you put money into your savings.

YOU’RE PLANNING A BIG MOVE

Some people view retirement as their chance to pack up and go. That may mean relocating to a comparably expensive home in Florida, Texas, or a retirement community. Either way, you’ll probably want to hang on to your mortgage.

Paying all cash for a new home is ideal. You shouldn’t do it, though, if it means strains your bank account. Don’t leave yourself cash poor paying off your current mortgage if you plan to finance your next home.

When to Carry a Mortgage into Retirement

More Americans than ever are retiring with a mortgage. According to American Financing, 44 percent of Americans over the age of 65 retired with a mortgage. That figure was a mere 30 percent in 2011 and 22 percent in 2001.

While carrying a mortgage into retirement may not seem ideal, there are times where it’s a savvy financial move. Here are four scenarios where a mortgage can work with your retirement aspirations.

YOU PLAN TO DOWNSIZE

Downsizing is a shrewd option for new retirees. You simplify your living expenses while reaping a profit for selling your old home. You can also kiss your mortgage goodbye if your current home equity exceeds the value of your new property.

There are two things to remember before downsizing: taxes and closing costs. You’ll owe a capital gains tax for selling your home, which is due in April of the following year. You may also have to pay closing costs, such as agent commissions and legal fees, though you can try to convince the other party to cover them.

YOU PLAN TO RENT OUT YOUR HOME

The rise of Airbnb has more homeowners than ever renting out their homes. It's a great way to meet new people and avoid tapping into your savings. Play your cards right, and you can even turn a profit after you finish making your mortgage payment each month.

How much you earn from renting depends on many factors, including supply and demand and location. The Airbnb homeowners in St. Joseph, MI, rent rooms for an average of $132 per night. Meanwhile, rooms in Little Rock, AR cost $56 and rooms in Marion, OH go for $102. This is all to say renting provides extra income, but results may vary.

YOU DON’T HAVE OTHER SIGNIFICANT EXPENSES

Feel free to greenlight carrying a mortgage into retirement if you’re financially secure. There’s no harm in making a few more payments while playing golf instead of working. As a rule of thumb, you should have three to six months of cash reserves in case of emergency expenses.

You should feel good about your finances. You don't have any other outstanding debts, and your investments are low-risk and diversified. The real key is figuring out how to eliminate three putts from your short game.

YOU WANT PEACE OF MIND

Everyone wants to say goodbye tension and hello to their pension. While you’ll still have to make monthly mortgage payments, you may be close enough to paying it off that it doesn’t matter. In this case, the peace of mind of retirement outweighs paying your mortgage early.

If you’re determined to retire before 59½, consider tapping into your savings. For instance, you can use your 401k and pay the regular income tax for the final payments. Even if you pay the penalty, you’ll likely come out ahead on your mortgage interest rate.

The Bottom Line

Deciding whether to carry a mortgage into retirement requires a lot of hard questions and honest answers. What are my plans for retirement? What are my current financial obligations? Is there a prepayment penalty? What are the tax consequences if my children inherit my mortgage?

Paying off your mortgage comes with a warm and fuzzy feeling, it’s not always your best move. If you want to finish making payments, make sure you have the savings to retire in comfort. If you don’t, you can use your mortgage to lower your tax bill or pay it off with investment returns.