Entering retirement debt-free is psychologically and financially liberating. Yet for many individuals, enjoying lower expenses during retirement can turn out to be nothing more than a myth, in large part due to your mortgage.
Your mortgage payment is typically your largest monthly obligation. Today, people seldom stay in the same house long enough to pay off a 30-year mortgage. Even if they do, many people restart the payment clock by refinancing or by taking out a home equity loan. Here are seven tips to consider if you’re contemplating your mortgage as you enter retirement.
1. Refinance To A Shorter Term Mortgage
Today’s low interest rate environment might allow you to refinance to a shorter loan structure for the remaining term of your existing mortgage, pushing your pay-off date closer to your target retirement age. Shorter-term mortgages typically carry lower interest rates. This could help to keep your monthly payment close to its current amount, even though the loan pays off more quickly.
2. Make Additional Principal Payments
Most mortgages allow pre-payment of principal balances. Making additional payments is powerful in two ways:
- The pre-payment amount helps to reduce your principal balance.
- While this doesn’t change your monthly payment, a smaller remaining principal means that you pay less interest on the outstanding loan balance.
In combination, these two factors help to truncate the life of your mortgage loan, pushing you closer to the finish line.
Note: Be sure to confirm that you can make pre-payments on your mortgage, and always indicate that it’s a ‘principal prepayment’ on your check’s memo line.
3. Re-cast Your Loan
Another pre-payment option is to re-cast your loan. This is often done when someone wants to make a large, one-time prepayment e.g., if you wish to apply a portion of an inheritance to your mortgage.
Recasting the loan allows you to re-amortize the remaining balance over the original life of the loan. While this strategy doesn’t help you to pay off your mortgage earlier, it does help to reduce payments, which perhaps makes them more affordable in retirement.
Not all loans can be re-cast, and the number of times you can do so is often limited. In addition, there’s typically a cost of a few hundred dollars.
4. Beware Of Refinancing To Simply Lower Your Rate
Obtaining a lower mortgage rate and a lower monthly mortgage payment is always tempting, but in the long run, refinancing doesn’t always save you money. Starting the clock over means you’ll be paying for longer – unless you truncate the term of your mortgage e.g., switching from a 30-year to a 15-year mortgage, or make principal pre-payments. You’ll also incur refinancing costs and your interest-to-principal ratio will reset, paying less toward principal at the beginning of each loan. Typically, any rate differential needs to be meaningful in order to make up for these factors.
5. Keep Your Mortgage With No Changes
If you’re close to retirement and unlikely to pay off your mortgage either before or shortly after you retire, you might be better off keeping your existing mortgage and simply continuing to make your obligated payments. This keeps more cash in your pocket in lieu of paying down the principal, giving you more freedom and the ability to continue making mortgage payments post-retirement.
6. Rethink Home Equity Loans
Borrowers often use home equity loans to get over a cash hump. However, these loans should always be used on a temporary basis only, as they either command variable rates that can increase, or higher fixed rates relative to a traditional mortgage. The term is also shorter, typically 10 years.
If you project your income will decline during retirement, you might need to change your mentality toward home equity loans, as paying off the balance will become more arduous as time goes by. Ideally, it’s better to save and set aside resources for large expenses in retirement.
7. Do The Math!
Finally, the most important recommendation with any of these options is to do the math. Due diligence will help to ensure that you’ll ultimately be saving money, whatever approach you choose to take.
SageVest Wealth Management frequently reviews mortgage considerations as part of broader financial planning exercises. We invite you to contact us if you think any of these strategies might be of value as part of your long-term retirement goals.