Most people close to retirement will start to think about paying off their mortgage before retiring.
A major point to consider is the amount of interest to pay. Banks, home developers and real estate brokers highly favor the 30-year mortgage. They prefer to market the long-term mortgages.
A 30-year mortgage term gives buyers the option to fully stretch themselves when it comes to buying a home. This type of mortgage will mostly likely double the interest amount compared to a shorter term. Even though the monthly payment on a shorter mortgage is a lot lower, nearly 90% of buyers opt for the 30-year mortgage term.
For instance, an applicant for a 15-year mortgage is likely to charge an interest rate of 3.75%, while a 30-year mortgage is closer to 4.15%. A home loan with a 15-year term at $100,000 will reduce the total interest by about 60% or $30,500
Other options to save money are to put the interest payment for the mortgage in a private retirement account. This helps to earn a useful amount of interest and any return due is tax free.
There are several different ways to pay off the mortgage based on personal circumstances.
1) Firstly, someone in their 60s with three children who has two properties with an existing mortgage. The two mortgages relate to a vacation home with a 30-year mortgage at 4.2% that runs until 2045 and a 15-year mortgage on the main residence at 3.35% that expires in 2029. There is the option to clear the outstanding balance on one of the home loans using stock. But, it is important to make the right decision.
Many people would take the sensible approach of clearing the balance on the main residence in the event of something happening in the future. However, there is also the option to pay off the vacation home and then spend the extra each month to pay down the mortgage are a quicker rate.
2) Secondly, a person has a total mortgage payment of $400 per month (principal and 3.5% interest). Additionally, a further $500 is paid to cover the cost of taxes and insurance. However, the insurance and tax payments will continue even in the event of paying off the mortgage early. This person has the option to clear the outstanding balance on the mortgage using high appreciation stocks or IRA shares that come with certain tax commitments. The preferred option may be to continue as is with the monthly mortgage payments and avoid clearing out the total savings.
Basically, if the stocks and shares needed to clear the loan have a more favorable rate of return and high fees to access, the best course of action is to continue paying off the mortgage as normal. However, there is always the risk that the shares will fall in price in the future. If choosing to clear the loan, there is the potential of a 3.5% return. Predicting the value of the shares at a positive is highly risky. In general, it is best to leave the IRA until retired. The option to only own index funds can be a useful idea with the lower fees associated. Also, there is the option to pay a higher mortgage payment each month in an effort to cut the cost of interest paid.
Use a mortgage calculator
In the event of not being entirely sure, there is always the option to use a mortgage calculator. They are very useful to help analyze the options to pay off the mortgage. Additionally, it is helpful to include scenarios such as a static house value or increased property taxes. For instance, the 2008 financial crises lead to homes falling nearly 20% in value.
The ability to lower fixed costs on retirement is certain to give a positive benefit to everyone. With monthly costs kept to a minimum, there is less need to withdraw money from the savings or portfolio account. Also, if the financial markets have another rough period, many retired people will be able to stay in good shape.
Overall, there are essentially two sides to consider in the process of planning the retirement: the ability to reduce spending and accumulate wealth. If able to clear the mortgage before retirement, this can help prepare for future recession, more expenses, and having less income. With no mortgage to worry about, there is more time for other expenses and having fun.