House Sense


Start with the House

Whether you are 27 or 57, understanding how your home mortgage can affect your retirement plans is very important. A fully paid mortgage might be something you look forward to, but is paying off your home loan the best option for your financial goals? Considering current home mortgage loan interest rates, tax codes, and your savings, it might make sense to keep a mortgage during retirement. While social and financial situations vary, there are three key options to contemplate when deciding what to do with your home mortgage when retiring.

  1. Pay off your home loan quickly so you don’t have a mortgage payment during retirement.
  2. Pay of your mortgage and sell your house after retirement to live off the money you made in equity.
  3. Carry a home loan into retirement (whether on your current home or a new one) and reap the benefits of tax deductions while keeping the payments lower and manageable.

Which option is best for you?

Option 1

If you are planning to reside in your current home through retirement, it might be the best idea to pay off your home mortgage loan. This is financially beneficial because it eliminates a large debt. However, you might be storing money inside your home (and we don’t mean under the mattress!). What could happen is you may spend money paying off the mortgage instead of maximizing your IRA or 401K. This is a decision that may require professional guidance to analyze your financial plans to determine if paying off your mortgage is your best option.

Option 2

Another retirement option is to pay off your home loan as soon as possible with the intention that when you retire, you will sell your home and live off the profits. Your home equity will essentially become your retirement fund. However, with this option, you will need a place to call home which could mean another mortgage unless you downsize.

Instead of counting on your home equity, you may want to invest your money elsewhere. There are many options for investment including stocks, bonds, or rental real estate, which allow you to collect dividends and increase your net worth. In this scenario, it is crucial to know where you hope to retire to better understand the financial ramifications of selling your home to live off the proceeds.

Option 3

A final option is to carry a longer mortgage throughout your retirement, whether it is on your current home or a new one. During retirement, your children will most likely have homes of their own, which means your home mortgage interest may be your only available tax deduction. The income you may receive from your 401k or IRA will be taxable income and you will want tax deductions, which your mortgage interest can help offset. This option will require careful budgeting to ensure that you always have enough income to pay your mortgage while comfortably living the lifestyle that you desire. You may want to consider a smaller home for a variety of reasons, but look to take the longest mortgage you can carry in this situation.

It is important to understand all of your home loan options as you head toward retirement and a good financial and mortgage planners can be key to making your long-term goals successful. Planning for financial stability now will set the stage for enjoying your retirement years.