Some retirees may have already paid off their mortgage years ago, but others have continued with this monthly expense. There are benefits to pre-paying mortgages and here are a few reasons why this is worth exploring.
An individual decision
First, the decision to pre-pay your mortgage is an individual decision with numerous factors affecting this.
Why? He said, “I’m in favor of paying off the mortgage, as long as it doesn’t come at the expense of funding your 401(k), Roth IRA and things of that nature.”
Still, he added, it’s not only an individual decision but also one that should be from a bigger plan. Warnkin said, “Ideally, I’d like to see the last payment coincide with the date you retire. A fair number, 50 percent of our retirees, achieve that. But, as life unfolds, sometimes people have to take a home equity line, or help a child with a down payment on a house, medical issues, and sometimes they arrive at or near retirement with a mortgage.”
For some retirees, paying off their mortgage just prior to entering retirement may be the best option for them.
Emily Sanders, managing director at United Capital in Atlanta, said, “In general, if client has the liquidity to pay off the mortgage – a lump sum from their job, retirement funds that are available but not heavily taxed – we would encourage them that to pay off a mortgage to enter retirement as close to debt free as possible.”
Realize a good return
Similar to paying off any debt, by cutting down your mortgage payment, you’ll receive a guaranteed return. On the high end, the return will be your mortgage’s rate (if you don’t itemize your mortgage and don’t deduct mortgage interest on your tax return), such as 5 percent to 7 percent.
On the other hand, if you deduct mortgage interest, then the rate of return will vary from the itemized deductions exceeding the standard deduction. The amount of interest you pay will decline every year because the principal portion of mortgage payments increases each year.
Enjoy tax savings
Along with receiving a return, you’ll also undergo fewer expenses in retirement. This means less income will be needed. And this will also bring fewer taxes thanks to U.S. taxation system as well as fewer taxes on your Social Security benefits.
In essence, you’re cutting your retirement expenses in many different ways.
Review opportunity costs
While the aforementioned reasons all sound promising as you consider whether to pre pay your mortgage, one cost you can’t ignore is opportunity costs.
How will this affect your savings?
Let’s say that instead of paying off your mortgage, you made an investment that would return more than your mortgage rate. As for your retirement account, by adding to it, it offers tax advantages that would go away if that money went to your mortgage.
Regardless, the end goal for most retirees is live financially independent. And when you’re paying off debt, this ideal doesn’t happen. In fact, according to Securian Financial Group, just 29 percent of retirees are debt-free.
With a mortgage, the lower the interest rate, the easier it is to manage debt. And because many mortgage rates are low, you make take your time paying it off; however, if you’d like to enjoy your retirement years, after you’ve spent some money from your retirement accounts, then paying off the mortgage could be a good strategy.
This could also cause you to review this decision not only as a financial one but an emotion one.
Pre-paying your mortgage is an important decision and a personal one. Ask yourself some of the aforementioned questions. If you still have financial concerns, meet with a financial professional who can help answer your questions and move you toward a retirement that doesn’t include paying a mortgage.
source: totalmortgage.com
