Retirement is something most people dream of — and part of that dream is debt-free living. But what if you’re headed into retirement with a mortgage? If you are, you’re certainly not alone.
GOBankingRates spoke with financial experts to get the low-down on whether or not you can — or should — retire with a mortgage. Here’s what they said below. Also, check out some of the perks of paying off your mortgage early.
Many people dream of retiring mortgage-free to a life of relaxation and financial freedom. But the reality is that a significant number of retirees are still paying off their mortgages when they leave the workforce. In 2019, nearly half of homeowners aged 65-79 had mortgages. So how do you manage retirement when you still have mortgage payments to make each month? Here are some tips.
Consider Downsizing to a Smaller Home
If you’re still carrying a large mortgage on a big house, downsizing to a smaller home can be a smart move for retirement. This frees up equity that you can use to pay off your mortgage faster or invest for added retirement income. And it reduces your housing costs. With a smaller home you’ll have lower property taxes, utilities insurance, and maintenance expenses. Just make sure you can still live comfortably in the downsized home.
Pay Off Your Mortgage Faster
Making extra mortgage payments while you’re still working gives you a head start on paying off your home loan sooner. Even an extra $100 or $200 per month can slash years off a 30-year mortgage. Try to put any bonuses, tax refunds, or inheritance money directly toward your mortgage principal. The faster you pay it down, the less you’ll owe when entering retirement.
Refinance at a Lower Interest Rate
With mortgage rates near historic lows, refinancing could really pay off. You can likely get a much lower interest rate than you currently have, which reduces your monthly payments Refinancing from a 4% rate down to 3% could save you tens of thousands of dollars over the loan term Just be sure to do the math to ensure refinancing makes sense for your situation.
Explore Reverse Mortgages
For homeowners 62 and older, a reverse mortgage allows you to tap home equity without having to make monthly payments. The loan is repaid when you sell the home or pass away. Reverse mortgages can provide tax-free cash to fund retirement, but come with fees and compounding interest. So carefully weigh the pros and cons before getting one.
Delay Social Security Benefits
One strategy is to keep working a few extra years before claiming Social Security benefits. This allows your future monthly payments to grow bigger. Then when you do retire, the boost in Social Security income can help cover mortgage payments that used to come out of your work earnings. Just make sure to coordinate properly with your spouse if you both receive benefits.
Use Retirement Funds Strategically
With proper planning, you may be able to use Roth IRA contributions or Roth 401(k) conversions to fund mortgage payments in early retirement. Since Roth accounts provide tax-free withdrawals, you can avoid bumping up your income taxes. Also consider if a 401(k) loan makes sense to pay down your mortgage sooner while still working.
Relocate to a Cheaper Area
Sometimes the most affordable way to retire with a mortgage is to move to a part of the country with lower housing costs. While you’ll still have monthly payments, downsizing and relocating to a cheaper area stretches your retirement budget much further. Make sure to consider all the costs, like taxes, healthcare, and transportation when choosing a retirement destination.
Evaluate the Pros and Cons
Before deciding if carrying a mortgage into retirement is right for you, carefully weigh the pros and cons. A mortgage provides continual access to your home equity for investing and emergencies. But payments are a fixed monthly expense that impacts your cash flow. Look at your full financial picture to determine the better path forward.
Have a Solid Retirement Plan
Any remaining mortgage payment when entering retirement should be accounted for in your overall retirement plan. Review your expected income streams like Social Security, pensions, and investments to ensure they can comfortably cover mortgage payments plus other necessities. Tracking your expenses and creating a retirement budget also helps guide smart decisions.
Retiring with mortgage debt isn’t ideal. But it’s possible with careful planning, strategic use of resources, and weighing your options. The keys are understanding all the costs, making fiscally sound choices for your situation, and having a solid financial roadmap to follow. Then you can make the most of your retirement years, even with monthly mortgage payments.
The Benefits of a Mortgage-Free Retirement
While both experts agreed that retiring with a mortgage is possible, they also said there are advantages to entering retirement without one.
Saccaro said, “It’s always a great goal to enter retirement without a mortgage. Doing so reduces your income requirements and could even lower your taxes.”
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The Truth About Retiring With A Mortgage
FAQ
Can I retire if I still have a mortgage?
If you retire and have a mortgage, you will still owe your mortgage after retirement. Your mortgage is a contract with a lender. Retirement changes nothing.
What is the $1000 a month rule for retirement?
Can I retire if my house is not paid off?
Mortgage payments are generally a constant, or even reducing, payment when you’re approaching retirement. So it’s not necessarily the worst debt to have when retired. If you wanted to, you could potentially switch to a ‘retirement interest-only’ mortgage, which could be quite a cheap option.
Can I retire at 62 with $400,000 in my 401k?
While retiring on $400,000 is possible, you may need to adjust your lifestyle expectations if this is your final retirement amount. If you want to retire early, $400,000 might be a difficult number to make stretch.