If you are a homeowner, you probably know the feeling that you are under a tremendous weight and that you will probably be in debt for the next 20-30 years, or possibly even the rest of your life! It can be hugely depressing when you look at that and the likelihood that a mortgage will become a very close “friend” of yours—forever. It’s a huge decision to buy a home and more likely than not, it will be the biggest financial decision that you will ever make. Scary?
In 2015, about 62% of all Americans owned their own homes, a number that’s been pretty consistent over the past 20 years (although there has been a decline since 2000). Here’s the scary part. Less than one third of all those homeowners actually own their homes free and clear, and that means that the majority of them have, wait for it…a mortgage!
When you think about owing money, it is uncomfortable. I have been living with a mortgage payment for most of my adult life, with my first experience way back in 1976 when I bought my first home. I was 27, that was 40 years ago and I am still living with my “friend” even in retirement. He just won’t go away. And that brings me to my point here: having a mortgage in your retirement years is not what you want to do! Trust me on this one, it’s a cloud that hangs heavy over one’s head. If you can, you need to think about that looong before you retire. Of all people, I let this one slip and I have to blame myself for it. Even if you have the best intentions and the smarts, it still may be something you will have to deal with, so pay attention and let me try to help.
How the Cycle Begins
One thing that happens when you buy a home, or at least as far back as I can remember, is that when you are young you tend to buy a home that you will grow into. That means it may be the place where a growing family wants and needs a little extra space for their kids and a backyard. All of that extra space brings a heftier price tag and bigger taxes and monthly bills for the upkeep. When you are working and upwardly mobile as I like to say, as your family grows, your income usually does along with it. Today, that includes a two wage earning family. So when house hunting and committing today, the dual wage earning family has an even wider-eyed look at home prospects and overextends themselves because of it. Just sayin’!
So how do you get ahead of this potential mess that will be a part of your life for most of your future, if not all of it? Did you think about it before you were all grown up and in the middle of such life encounters?
Paying Off the Mortgage Then and Now
Paying off the mortgage is a goal for most of us. You might have lived through that experience vicariously at least as I did. I can remember when my parents finally did it after 30 years and they had a little celebration way back in 1984 when they paid off that little row house with 3 bedrooms and 1 bath. I spent the first 18 years of my life living there. That was way back when their monthly mortgage payment and taxes were under a hundred dollars a month.
Let’s fast forward to 2017. It’s a very different world today when it comes to housing, mortgages, and financing it all. The transient nature of the average American and their family make buying and selling properties more frequent that ever before. With each move or relocation, a homeowner almost all of the time obtains a new mortgage and a lot of those are 30-year mortgages that restart the payoff clock once again.
Ways to Avoid the Lifelong Mortgage
One piece of advice I can give in hindsight is to avoid that 30-year “do over” if you can. There are many more options today, such as 15 or 20-year rates designed for the more mobile family who may be moving again in a shorter number of years. Shortening the term of the mortgage and using the equity in the old home to reduce the mortgage is a guaranteed way to stop the potential pain of having a mortgage into your retirement years.
If you’re staying put in your location for the foreseeable future as you approach retirement, you do have several options to choose from. First, there’s the popular “downsizing” approach which literally means moving to a smaller place and reducing the cost of living dramatically. If you are not giving up homeownership and renting, and you have enough equity, you can buy a new home outright, no mortgage at all.
Unfortunately, the trend these days seems to be almost the reverse. It’s becoming more common than ever for retirees to buy properties in new “retirement communities” that offer every type of creature comfort and luxury for the “active” retiree and thus make the downsized property into an upsized expense. Here in NJ you can buy a retirement home for upwards of $600,000 dollars and most are not owned outright. Even if I could afford to do that, I wouldn’t.
How to Pay Off the Mortgage
I’m not writing this article just for those of you out there who are approaching retirement. There are several things that those of you who are currently homeowners and still have many years ahead of you to work and earn can do to deal with your friend, Mr. Mortgage.
Consider these options:
Refinance your existing mortgage to a shorter term
If you are in the first 15 years or less of your mortgage, for example, it may be better for you to consider a 10 or 15 or 20-year refinance which will shorten the term and save you thousands in interest payments over the life of the loan. There is a cost to refinancing but it can be rolled into the mortgage if you like and therefore may not require any out of pocket expense when you do it. It may be worth it in the long run; check a refinance calculator to be sure.
There are dozens of mortgage calculators online that can show you the specifics and savings, but the real benefit is to shorten the number of years you will be paying the loan. If you started your current 30-year mortgage after age 45, then you are looking at a mortgage payment until you are age 75, probably fully retired and still having a big unnecessary expense on your plate.
Increase your payments to the mortgage principal every month
If you add even $25, $50 or $100 dollars a month to your mortgage payments every month you can knock “years” off the 30-year term. Additionally, you can make bi-weekly half payments on your mortgage thus making 26 half payments for a total of 13 months’ payments per year. That will also pad your principal payments and save you time and money. There isn’t any cost to doing this (assuming your mortgage has no prepayment penalty) and if you can afford it, it’s the cheapest way to avoid paying off your mortgage in your retirement without selling and renting. Just make sure that your principal payments are credited properly by checking your mortgage statement.
Considering investing your money instead of paying your mortgage more quickly for a better return
Think about this for a minute, paying extra principal off your mortgage (which let’s say is at a great 4% rate) is a guaranteed way to save money on your interest payments for the loan. The more you pay now, the more money you will save in the end because your payoff is reached sooner. While it is true that there is potential for better returns investing in the market, it isn’t guaranteed and has risk. So bottom line, using the money for investments rather than reducing the cost of your mortgage can actually make your financial situation more tenuous and risky. Besides, many people say they’re not paying off their mortgage so they can invest more, but don’t actually do the investing!
Why Avoiding a Mortgage in Retirement is Important
In my case, I bought my condo after I remarried in 2007 when I was age 56. I took a 30-year mortgage out because it was the most affordable for the monthly payments. I was not in a great place financially after my 1998 divorce and I never fully recovered from it. My health, which began to decline shortly after purchasing my condo, didn’t help and I was forced to retire from working full time in 2012. That was about 5 years earlier than I had been planning.
The result of all of these events means that the cost of my mortgage, condo fees, and real estate taxes are a huge chunk of our joint income, rivaled only by our health expenses. Each year since 2007, those two categories represent over 50% of our budget. If I didn’t have the mortgage payment alone staring at me for another 23 years, I would have about 15% more disposable income to spend. Of course if wishes were horses, beggars would ride!
Having said all of the above I worry about this stuff all the time, particularly because my wife is 21 years younger than I am, she will ultimately have to deal with the mortgage when I am no longer around. And that really worries me. That’s why we are paying extra principal each month to shrink our mortgage.
There are numerous reasons to own a home and have a mortgage payment to do it. If you need the living space and/or the investment that a home affords you to grow equity and net worth, those are good reasons. It also provides a tax write-off as an additional benefit. Real estate ownership is part of the American Dream and that doesn’t seem to be disappearing any time soon.
The message here is this one: at some point home ownership can become a burden for you or a loved one. Life circumstances like loss of a job, poor health, and divorce can damage your ability to keep and own a home that has not been paid off. Decisions you make about relocation or “sizing up/down” your home can affect the amount and years you are on the hook for your financial commitment. You may not be thinking at age 40 of what your life may be like with poor health and 20 years left on your payments at age 67. There are some good options to consider now if you own or plan to own a home. Do not ignore what can go wrong and often does…pay off the mortgage during your prime earning years.
Do you fear your mortgage? Do you have a plan in place that will make your retirement years mortgage free?