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Effective Ways to Retire Without Worrying About a Mortgage

Effective Ways to Retire Without Worrying About a Mortgage

Admit it: whether you're 30, 45, or 65, the prospect of a mortgage-free retirement is tempting. No monthly mortgage payment to your mortgage lender means spending the extra money to enjoy your retirement. After years of paying your mortgage in principal and interest, that's the least you deserve, isn't it?

However, more and more Americans still have a mortgage when they reach retirement age. According to a 2019 Harvard's Joint Center for Housing Studies report, 46% of homeowners between the ages of 65 and 79 have not yet paid off their mortgage. Thirty years ago, this number was only 24%.

There are several smart ways to retire mortgage-free. We've created some that fit a variety of retirement scenarios. Some of these approaches benefit from an early start, so plan as soon as possible. Other mortgage-free retirement options can be explored even if you're about to enroll in Social Security and Medicare. If your aim is the peace of mind of paying off your mortgage before you retire, check out these seven ways to retire mortgage-free.


Make additional mortgage payments.

Over time, a few dollars added here and there to your mortgage payment can translate into thousands of dollars in interest savings and years of reduction in your payment term. The trick is to find little but effective ways to save money on other household expenses so you can apply those modest savings to your mortgage. For example, switching from traditional incandescent bulbs to LED bulbs can save $100 per year over 10 years in energy costs. A configurable thermostat can save you up to $180 per year.

A little goes a long way. A $225,000 mortgage at 5% over 30 years has a monthly payment of approximately $1,200 (excluding taxes and insurance). You will only pay about $210,000 in interest over the life of your mortgage. But if you add an extra $100 monthly on the same mortgage, you'll save almost $40,000 less in interest and pay off the loan five years sooner.


Refinance your mortgage

A surefire way to lower your home loan bill is to refinance your mortgage at a lower rate for the same period or longer. You will benefit from lower monthly payments and a lower charge on your bank account. Not a bad idea if you are short on money. What you won't gain this way is a mortgage-free pension.

You will need to switch to a short-term loan to pay off your original mortgage by refinancing. Let's say you're 50 and have 25 years left on an original 30-year, $225,000 at 5% mortgage, and still owe about $200,000. You would pay about $155,000 in interest on the original mortgage over the remaining quarter century and be mortgage-free at age 75. For approximately $320 more per month, plus one-time closing costs, you can refinance a 15-year mortgage at 4% and save $87,000 in interest. And, of course, you would have been mortgage-free a decade earlier, at age 65.


Downsize your home

Think about it: when you should be enjoying the simple life, do you need a formal living room, a separate dining room, and two extra bedrooms you've never set foot in? If your answer is no, consider downsizing.

Moving to a smaller house in the same area means that you don't have to say goodbye to your friends, family, and community. Of course, the beauty is also that you can pay cash for your new, smaller home. This means there is no mortgage.

And don't limit your idea of size. Just because you've spent the last 30 years on a traditional farm doesn't mean you should buy another farm with smaller square footage. Consider conventional alternatives (condos, townhouses) and unconventional options (boats, trailers, or even mini-retirement homes).


Move to a cheaper city.

Can't find the perfect place at the right price to retire in your city? Retire somewhere less expensive. Of course, there will be sacrifices, but what you leave in familiarity, you will compensate for financially. The best retirement locations combine extensive business with affordable real estate. And moving to a convenient location will increase your chances of not having to take out a new mortgage.

Housing prices are not the only factor when it comes to moving. You also need to weigh taxes. In New Jersey, for example, annual property taxes are $2,530 per $100,000 of assessed home value. You would only pay $1,000 on $100,000 of taxable value in Georgia, one of the top 10 states for retirees in the United States.


Find a roommate

Don't underestimate the financial benefits of a roommate. By renting out an extra bedroom and applying the rent you charge to your mortgage, you can save the years it takes to pay off your loan. An extra $250 per month on a $150,000 30-year mortgage at 5% will pay off the debt 12 years earlier. An extra $100 monthly pays the mortgage six and a half years in advance.

The benefits to your bottom line go beyond the mortgage. Rental income can help cover utility costs (gas, electric, cable, internet), maintenance, and other household expenses. As a bonus, a roommate can help with household chores and keep you company.


Rent instead of own

A guaranteed way to retire mortgage-free is to sell your current home for a profit and use the proceeds to rent a place to live in retirement. Although it may seem like you're just writing a check to a landlord and not a lender, the differences between renting and owning can be significant.

The benefits of renting in retirement:

  • No roof leaks to replace.

  • No property taxes to pay.

  • No net worth tied to illiquid properties.

Plus, no residential bottlenecks prevent you from moving the way you want in retirement. You can also save a few dollars on living expenses like rent insurance. According to the Insurance Information Institute, the average annual premium for renters insurance is $185, compared to $1,192 for homeowners insurance.

As for the popular tax breaks that have long supported homeownership arguments, some of these homestead deductions have been limited or eliminated by the new tax law passed in 2017. Doubling the deduction lump sum that began with the 2018 filings also means fewer taxpayers itemize, further limiting access to residual tax incentives tied to residences.


Move in with your kids.

Of course, for some families, the idea of parents retreating to the grandparent's suite above their children's garage is a nightmare of contrasting generations and intertwining styles. But in your case, it may be a dream scenario where you can see and help your grandchildren grow. You can take care of your grandchildren now and be taken care of later.

More and more older parents are moving with their adult children. According to a Pew Research Center study, of the 79 million adults in the United States who live in shared homes, 14% are parents who live in their children's homes. In 1995, the percentage of parents living with their children was 7%.

Everyone gets to win financially. Adult children save on childcare, and retired parents can also help pay the family bills. And, of course, by moving in with their son or daughter, the retired couple can ditch their mortgage, pocket the equity, and spend it on an RV to escape the crowd whenever they want.


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