If you’ve been paying on your mortgage for a while, it’s likely crossed your mind that you’d love to pay off your mortgage and own your home free and clear. It would be great to get it done by the time you retire – after all, it’s one less monthly payment.
We’ll go over whether getting rid of that mortgage payment actually makes sense for you. If it does, you have a couple of good options for timing your last mortgage payment with your retirement.
Paying Off Your Mortgage: The Pros and Cons
It may seem logical that you’d try to pay off your mortgage before you retire, but it may not make sense for you depending on your financial situation and goals. The next couple of sections will take you through the pros and cons of paying off your mortgage before retirement.
Reasons to Pay Off Before Retirement
There are several good reasons that it may make sense for you to make your final mortgage payment before you retire:
- You’ll no longer have a monthly payment to make. This means you can spend that money on your grandkids, travel, other investments, or finally making that passion project happen.
- It could significantly increase your financial security. If you no longer have your monthly payment, you only have to pay your property taxes and insurance. This means that if a big medical bill comes up unexpectedly, you’ll be in a much better position to handle it.
- It might make more sense to use low-interest savings to pay off your mortgage rather than refinancing to a lower mortgage rate.
- You could beat the cycle. Property values are in a rising trend right now. History tells us that what goes up must come down. Paying off your mortgage as quickly as possible can protect you from ever owing more on your home than it’s worth.
Why You Might Keep Your Mortgage
There are certainly pros to retiring without a mortgage payment, but depending on your financial situation, it might make a lot of sense to keep it and continue paying when you’re off the job:
- It might make more sense to put your money toward other things right now rather than putting a significant portion of your monthly income toward your mortgage payment in hopes of paying it off faster. The mortgage is traditionally one of the lower interest debt payments when compared to other items like credit cards. It may make sense to pay those down first.
- Because mortgage rates are extremely low right now, if you did have other investment areas you want to put your money into, you could refinance into a lower payment and put the savings into stocks or bonds, for example. You have a little more flexibility.
- You do get a nice little tax deduction by being able to write off your mortgage interest payments.
Strategies for Paying Off Your Mortgage
If you’ve begun to look across the horizon at retirement and want to drop your monthly mortgage payment, we have a couple of great options for you to take a look at.
You’re probably used to seeing mortgage terms that are 15 or 30 years. If lenders are feeling adventurous, you might see a 10 or 20-year term. Here at Quicken Loans, we have something called the YOURgage. This loan option allows you to take a conventional fixed-rate loan and pick a term anywhere between eight and 30 years.
Let’s say you want to retire in 12 years. Let’s also assume you have two different mortgage options, one that’s 15 years and one that ends in 12 years. Everything else about the loans remains the same. Your monthly payment will be slightly higher with the 12-year option because of the shorter term, but you’re going to pay less in interest over the life of the loan. If you’d like to try out some of your own scenarios to see what this would look like, you can check out our amortization calculator.
Maybe you’re looking to pay off your mortgage and give your retirement savings a little boost in the process. There’s a way to pay off your mortgage to eliminate your monthly payment while having the mortgage company pay you.*
If you’re 62 or older, a reverse mortgage can help you take the equity out of your home to pay off your current mortgage; you get whatever money is left over to use however you want. Many people use the extra money to pay off debts, defer using their other retirement assets, build an emergency fund, or achieve other financial goals.
You have three options when you take out a reverse mortgage:
- With an adjustable rate loan, you can choose to take a lump sum, monthly payments, a line of credit, or any combination of the three. If you don’t touch the line of credit, the amount of unused money increases in value over time, and you can also put any money you take out back in so it can continue to increase.
- With a fixed-rate loan, you get your money in one lump sum when the loan closes.
- You can also purchase a new home with a reverse mortgage, and not make a monthly mortgage payment for as long as you live in the home.* This could be ideal for empty-nesters looking to downsize or move closer to friends and family, but not wanting a new mortgage payment.
Obviously, there’s no such thing as free money, and when the last person on the mortgage is no longer living in the home, the loan comes due. At that point, your heirs have three options:
- If they wish to keep the home, they can choose to refinance 95% of the home’s value or the balance of the loan (whichever is lower) into a regular mortgage.
- They can sell the home. Since a reverse mortgage is a nonrecourse loan, your heirs are only required to pay back what they can get in a sale. If there’s any money left over after the loan is paid off, your heirs get to keep it.
- If your heirs don’t want anything to do with the home at all, the home simply goes back to the lender or investor in the mortgage.
*The homeowner is still responsible for the payment of taxes, insurance and property maintenance.
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