Retirement Mortgages

Understanding Retirement Challenges: Mortgages

Nobody likes to have debt looming over them. Yet, despite this sentiment, most of us owe money—as mortgage debt alone sits upward of $15.8 trillion1. While debt can accumulate seemingly overnight, paying it off can take decades. As a result, many of us are left facing these debts head-on as we near or enter retirement.

A recent survey found that 44% of Americans between the ages of 60 and 70 have a mortgage when they retire, with as many as 17% predicting that they may never pay it off2. How’s that for looming?

What’s more, a study citing US Census data asserts that the number of households with individuals age 65 and older with a mortgage has increased by 39% over the last 15 years3. If you’re a retiree or soon-to-be retiree with a mortgage, you’re in good company. But there are still measures you can take to pay off your mortgage—even on a fixed or limited income.

Consider these strategies to mitigate your mortgage debt in retirement.

 

Make Additional Payments When Possible
Let’s start with the obvious—the more often you make mortgage payments, the quicker you’ll pay off your mortgage in full. And while most of us have grown accustomed to making monthly mortgage payments, you don’t have to stop there. Try making an additional payment whenever possible—even if you can only afford to do so once or twice per year, this will go a far way in lowering your loan balance.

However, if you prefer to stick to your monthly payment schedule, you can always increase the amount of your monthly payments. Every dollar you pay beyond the amount due puts a dent in your balance. Just consider this: applying an extra $100 per month to your loan principal can save you thousands of dollars in interest and take years off your final payoff date—meaning you’ll be mortgage free that much quicker!

 

Switch to a Bi-Weekly Payment Schedule
Another smart way to pay off your mortgage faster is to adopt a bi-weekly payment schedule. Instead of making your full payment once a month, try paying half the amount every two weeks. This approach amounts to 26 half payments per year – equivalent to 13 monthly payments.

The best part? This tactic is hardly noticeable when factored into a monthly budget. By making payments toward your principal on a more frequent basis, you’ll accelerate the payoff process without having to make larger, lump-sum payments.

 

Consider Refinancing
When it comes to refinancing, the ideal situation is getting a lower interest rate and shorter-term loan. Keeping your monthly payment the same with a lower interest rate means more of your payment will be applied toward the principal balance, rather than interest. As a result, you’ll pay off the balance in its entirety much quicker and save money in the long run.

However, if you are considering refinancing, keep in mind that there are typically fees involved, so you’ll want to make sure the savings cancel out any associated costs.

 

Be Mindful of Prepayment Penalties
While making additional payments is surely key in paying off a mortgage, some mortgages come with prepayment penalties. And if you’re trying to make an extra annual payment, increase the amount of your monthly payments, or make a lump-sum payment, you may be required to pay a fee. Similarly, some lenders only allow you to make prepayments at certain times, such as the anniversary of the loan.

Before you start making any additional payments toward your principal, first check your mortgage terms for any potential penalties and/or special instructions. It’s also a good idea to call your lender directly and ask about how you can best go about paying off your loan more aggressively—without incurring penalties or fees in the process.

 

Pay Off Other High-Interest Debt First
While your mortgage may account for a large majority of your debt, it’s likely among the debt with the lowest interest. Other common debts such as credit cards, personal loans, and even car loans tend to carry much higher interest rates—costing you more over time. What’s more, the interest on these debts are not tax-deductible.

Before you start to take more aggressive measures to pay off your mortgage, you should first eliminate these other debts—even if they’re smaller or less significant in terms of the dollar amount.

 

Maintain Your Emergency or “Rainy Day” Fund
There are many benefits to paying off a mortgage as you near or enter retirement—but you don’t want to be left broke either. Before making extra mortgage payments, it’s important to make sure you have enough savings put away in an emergency fund that you could access in a pinch—while still maintaining some liquidity.

Whether you call it an emergency or “rainy day” fund, the goal is to have 3-6 months’ worth of basic living expenses readily available to tap into should a large, unforeseen expense or delay in income arise. Having this financial cushion in place is always important—and especially so when reallocating more of your monthly income toward paying off your mortgage.

 

Eliminate Your Monthly Mortgage Payment With a Reverse Mortgage
If you’re looking to eliminate your monthly mortgage payment altogether, and you are age 62 or older, tapping into your home equity with a Home Equity Conversion Mortgage (HECM)—or reverse mortgage—could be just the solution. If there’s an existing mortgage on your home, the loan proceeds from the reverse mortgage are first used to pay off that loan—and since no monthly mortgage payments are required* on the reverse mortgage, you can eliminate that monthly expense and keep more cash to use as you see fit.
There is no satisfaction like the feeling of paying off a mortgage and finally becoming mortgage-free. And even if you still have a mortgage payment in your retirement years, there are measures you can take to achieve this sense of satisfaction. By eliminating monthly mortgage payments, you can free up more cash flow, save money on interest payments, and enjoy the well-deserved peace of mind that comes with a comfortable retirement.

At Longbridge Financial, our ultimate goal is to give you this peace of mind. We can help you use your hard-earned home equity to address the financial challenges that impact so many Americans who are in, or preparing for, retirement.

Want to learn more? Contact the Longbridge team today.

 

 

  1. https://www.housingwire.com/articles/u-s-mortgage-debt-hits-a-record-15-8-trillion/
  2. https://www.chicagotribune.com/business/ct-biz-retirees-mortgages-survey-20180322-story.html
  3. https://www.housingwire.com/articles/46849-why-are-more-seniors-holding-onto-mortgage-debt/

* Real estate taxes, homeowners insurance, and property maintenance required.