Paying Off Mortgage and Retiring – 5 Reasons Why One Should Come Before the Other

Paying Off Mortgage Before RetirementBeing free of debt is a great way of enjoying your retirement years. Most people agree that paying off your mortgage before you retire is something that will give you peace of mind and more financial freedom. However, many people end up retiring before their mortgage is paid off, which might not be necessarily a bad thing. Like everything when it comes to mortgages, what is best for one home owner may not be the best for another. Essentially, paying off your mortgage before your retirement years is advantageous, but there are cases in which not paying it off is the better choice, especially if getting rid of your mortgage involves a large financial sacrifice (Read: Should You Rely on Home Equity When You Retire? Think Again!).

When is it better to Not Pay off Your Mortgage

Not having to worry about a large debt after retiring will most likely make your life much easier. Unfortunately, paying off a mortgage earlier is not always a good idea. With today’s interest rates, you are probably paying less than 5 percent on your mortgage loan, and more than 10 percent on your credit card balances. Mortgages are considered a good debt, which means that you should pay them off last, and worry more about other type of debt.

Unless you have large assets that you can use while retiring, you should think twice before paying off your mortgage. Your retirement accounts have more tax advantages, so you should put your money into those before paying off debt. An even worse idea is to pay off your mortgage using money from your retirement accounts. You will have to pay a large penalty for the withdrawal, and end up spending more than you would on your mortgage.

Also, if you are able to refinance your mortgage loan, you could be saving thousands of dollars. However, refinancing is expensive and you have to include closing costs in your calculations before deciding if refinancing will save you money, or you should keep paying the mortgage as before (Read: Do You Make These Mistakes? Don’t Kill Your Mortgage Refinance!).

Reasons to Pay Off Your Mortgage before Retiring

There are more reasons to pay off your mortgage before retiring than there are to not pay it off. To find out even more reasons click here. Taking the necessary steps to make sure that your retirement accounts are replenished is very important before deciding whether paying off your mortgage is worth it or not. Here are the reasons why getting rid of your mortgage should come before retiring.

  1. Peace of mind. After years of making large payments each month, you can finally say that you truly own your home. This is especially important after retiring, when your income probably won’t be as large as before, and the chances of generating additional income are thin. Finding a job, investing or starting a business in your retirement years is unlikely, so not having to worry about the risk of losing your home if something unforeseen happens, or about having to make a large payment each month, is a blessing. To learn more about the benefits see this.
  2. Savings in interest. Over the life of a mortgage loan, you will be paying tens or hundreds of thousands of dollars in interest, so paying it off as soon as possible means that you avoid paying all that interest. Even refinancing into a shorter loan will bring great savings, as long as you don’t spend a lot on the closing costs. Not only will you be mortgage free by the time you reach your retirement years, but you can also use the money that you saved for something that will make your retirement much more enjoyable.
  3. It allows you to focus on spending less. The process of paying off your mortgage allows you to focus on saving for retirement, as well. If you wouldn’t have a monthly mortgage payment, you might be tempted to use that money to make other large purchases, like an expensive car. Deciding to pay off your mortgage puts things into perspective and gives you a chance to focus on your future plans.
  4. Build equity. Paying off your mortgage means that, if you ever need money once you are retired, you can take out a loan against the equity in your home or sell the home and have access to all the equity in it. You can use the money to pay your medical bills, buy a condo, or even for traveling (Read: Home Equity Loan).
  5. Avoid higher interest rates if your rate is adjustable. Adjustable-rate mortgages can be either advantageous or disadvantageous, depending on how the interest rate fluctuates. If the interest rate keeps rising, then you might end up with a larger down payment during your retirement years, so paying your mortgage off makes sense.

Not paying off your mortgage before retiring makes sense in some cases, but not having to pay a large bill each month is more beneficial. Unless you have to dip into your savings and retirement accounts to pay off your mortgage, the peace of mind that not having a mortgage brings outweighs the pros of keeping your mortgage during your retirement years.

Should You Rely on Home Equity When You Retire? Think Again!

Should You Rely on Home Equity When You Retire-Think Again- 150x150The effects of the recent economic crisis can still be felt, especially by home owners, who have found out that the value of their investment has decreased because the housing market hasn’t fully recovered yet. Because most investments have lost some of their value, a large number of home owners felt the need to tap into the equity in their homes in order to have enough money for their retirement plans.

Your home is, most likely your most expensive asset, so tapping into its equity will resolve the financial issues that you might have when retiring, but it might not be the best idea to do so. You can access the equity that you have in your home through a home equity line of credit, a home equity loan, or a reverse mortgage, but you should know that there are some risks associated with this practice.

What Are the Risks of Relying on Home Equity When You Retire?

No matter what your retirement plans are, you will still need a home after you are retired. This means that you might have to find other ways of funding your retirement, ways that are less risky. Tapping into the equity in your home through a home equity loan, line of credit or reverse mortgage can be very expensive, and you can end up spending more than you initially were prepared to, or even lose your home. The interest rates, fees, and closing costs are usually much higher for these types of loans than they are on conventional loans.

If you decide to buy a new home and move out, you may find that you can’t afford a new home because the equity in your current home is very low. An alternative to taking out a second loan which will affect your equity is to downsize your home, which will free up some of the equity that you have built up in your home. By doing this, you will have access to funds that will help you with your retirement plans, while still having a roof over your head.

Planning Ahead is Important

Starting to plan your retirement while you are still young will almost guarantee that your retirement will be problem-free. If you wait until you only have a few years left until retirement, there are many problems that could come up. The economic climate can shift radically in only a couple of years, or even quicker, affecting the housing market and the equity in your home. This makes home equity loans and reverse mortgages a very inefficient way of funding your retirement. Predicting what the economy will look like once you reach your retirement years is close to impossible, so knowing if your home will be worth more or less is anyone’s guess.

Not counting on the equity in your home and planning ahead can save you a lot of trouble and headaches once you retire. Investing in real estate properties, savings plans, and/or stocks is a much better alternative to taking out home equity loans and reverse mortgages, even if you didn’t start at a young age. People who are close to their retirement age can still successfully invest their money wisely, and have enough once they retire.

Relying on home equity when you retire is the least efficient way of coming up with retirement funds. You will most likely end up spending more than you have to, and even put your home at risk by defaulting on a reverse mortgage. Planning ahead and starting to invest at a younger age is something that you should look into, because it is much safer and will ensure that you won’t have to worry about your retirement funds.

Big Government Changes to Reverse Mortgages in 2013

Big Government Changes to Reverse Mortgages in 2013- 150x150Reverse mortgages have been criticized for their high fees and expensive consumer features. In managing the losses borne by the FHA, the government has instituted a number of changes to clear close to $3 billion in outstanding mortgages. The Federal Housing Administration (FHA) has unveiled sharp curbs on the Home Equity Conversion Mortgage (HECM) to affect the changes. According to the Consumer Financial Protection Bureau, their defaults in repayments stand at approximately 9 percent.

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Changes to Come

With these new rules, a consumer should look at the loan terms carefully before making a step. A consumer will only access a smaller portion of their home equity when taking a reverse mortgage. A lender is also expected to set aside a significant portion of the borrower’s home equity in order to pay for future home insurance premiums and property taxes. Under the new rules, there are considerable restrictions barring citizens with lower incomes from taking HECM.

Both taxpayers and the FHA have been losing money under the HECM Standard loan, a fixed-rate mortgage loan. Under the new rules, it will be halted. This leaves the new HECM Saver as the only option for many borrowers. Even though the HECM Standard loan is comprised of higher insurance charges and other fees, it pays out to the borrower a higher percentage of the home equity than the HECM Saver, which charges no insurance cost. Since it pays out a smaller percentage of the home equity, it is more conservative, thus lowering the risk of losses, which typically leads to high insurance claims lodged by lenders in the private sector.

New Rules

Under the new rules, borrowers will only withdraw specified amounts based on their indebtedness. In other words, a borrower will not take more than is required to pay off all their liens and current mortgages. There are several factors that  HUD will use to determine this figure, including the borrower’s payment history. This will definitely shock those who are used to borrowing fixed-term loans, as a new formula will be unveiled for determining the amount that a borrower will qualify for.

Through the new rules, the federal government also wants to beef up financial assessment for borrowers- the ability to do impound on taxes and insurance on loans. This is obviously aimed at driving up the servicing costs, which may see the reappearance of reverse mortgage loans servicing fees.

Under the current HECM Standard loan, borrowers have the privilege of not undergoing a tight underwriting qualification procedure. But under the proposed HECM Saver program, all borrowers will have to undergo a very tight qualification process.