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How to Retire Without a Mortgage

How to Retire Without a Mortgage

Retirement should be about living your best life, and enjoying what you love, whether it is relaxing on the beach or on the golf course. It shouldn't involve worrying about debt, such as your mortgage. Proactively paying off your mortgage before your retirement can help you feel financially free.

The advantages of a mortgage-free retirement

Peace of mind isn't the only major benefit of paying off your mortgage before retirement. Here are some more.

It Increases your retirement income even more.

Economically, (retirees) eliminate monthly pay as well as the interest rate they pay and can reallocate that cash flow to savings. Those extra savings are money you can use for things you enjoy: maybe exploring new hobbies or indulging in luxuries you couldn't otherwise afford.

Earn a guaranteed return on your investment.

To avoid being tempted to invest for a bigger return than you will get by paying off your mortgage payment, remember that no investment is certain. On the other hand, eliminating interest payments guarantees a return. You also pay most of the interest in the loan's early years and must itemize deductions to pay it off. This means that the tax advantages of a mortgage diminish over time and can be completely eliminated if you take the standard deduction after retirement. Sounds complex? A tax professional will help simplify things for you.

Build equity you can fall back on if you need it.

Paying off your mortgage before retirement ensures that you have capital available if you spend your retirement savings faster than expected or have an unexpected and large expense that you don't have the funds to cover. A reverse mortgage, for example, can give you a lump sum and/or monthly payments on the part of the principal, and you don't have to pay off the loan while you live in your home.

How to pay off your home mortgage before retirement

Once you've decided to pay off your mortgage before you retire, you'll need the plan to make it happen.

1. Determine your retirement income.

Hopefully, at some point in your decision to buy a home, you will have a realistic plan to pay for it. Of course, it's easy to lose sight of this, especially in the early stages of home ownership. 

Luckily, even if you're nearing retirement age, you'll still have time to develop a strategy that will help you pay off your mortgage when you do. The first step should be to identify your retirement date and align your mortgage payment date with it.

Create a retirement income forecast to get an idea of when you can or want to retire. It gives you a satisfactory roadmap for what you need to do today to reach your retirement age goal. Mortgage repayment is a goal that can be factored into this projection.

This projection should consider all of your financial resources, cash flow, and assets to see if you have saved enough money to fund your retirement.

If you're not on track to adequately fund your retirement, this will help you see what steps you need to put in place now to reach your retirement goals.

2. Spend a higher percentage of your income on your mortgage.

Now that you can plan for your future retirement, you should be able to determine if you can comfortably afford to pay more on your mortgage. You can always make additional payments.

The additional amount you pay depends on how much in additional payments is affordable. If you can afford an additional $200 a month and has enough financial cushion, that's the amount they can afford.

Typically, you need to have a financial backup to cover you for up to six months, plus some unexpected expenses, like a car repair. Having that safety net is better than rushing your mortgage payments.

3. Refinance your mortgage.

You can consider a mortgage refinance if you have a 30-year mortgage or an above-average interest rate if it's right for you.

The surest method to pay off your mortgage quickly is to have an interest rate as low as possible because the lower the interest rate, the lower the money you will pay over time.

If you are eligible for your current loan, you should be eligible for a lower mortgage rate. The question is if your payments will be lower than your current payments and whether this will help pay off your home loan at the same time or sooner. If so, it might make sense to refinance.

You can also reduce the term of the loan to 15 years or less. You'll need to check your retirement plan to know if these payments will work with your overall budget.

While refinancing isn't for everyone, it may be an option worth exploring if you want to exit your mortgage sooner and take advantage of today's lower interest rates. You should consider the costs of closing a new mortgage when deciding whether to refinance.

Otherwise, you can get a similar result just by paying off your current mortgage.

4. Use windfall to pay off your mortgage.

If you made money from a scratch card or received an inheritance, get your hands on the mortgage instead of wasting the money.

Look for opportunities to accelerate payouts by using exceptional bonus money to help you achieve your goals.

The most common windfalls include cash gifts, tax refunds, and money earned at a yard sale. Pretend that money does not exist rather than expand your entertainment and lifestyle budget for a month or two.

Of course, this requires a commitment to your mortgage payment plan. Designate a special account, folder, or old-fashioned money jar to help pay off your mortgage.

5. Think about what expenses you can cut.

Seeing what expenses you can reduce and eliminate should be consistent with your plan to invest extra money in your mortgage.

If you feel that certain elements of your pre-retirement budget need to be cut down, then you may need to forgo certain elements. Look for ways to eliminate what may be more of a luxury than a basic necessity when evaluating your expenses.

That could mean saving on takeout, cooking at home, or planning cheap outings with friends instead of going on the usual date with expensive drinks. Activities that result in overspending should be flagged when developing the retirement plan.

You can create a simple spreadsheet or use an online tool that can give you a wealth of information about your expenses.

6. Resize your home.

Empty nesters tend to be good candidates for moving to a smaller home. Downsizing can also be a practical option if you're struggling to reach your retirement savings goal and your mortgage represents more than 25 to 30 percent of your income.

You might consider selling your existing home, buying a smaller one with a lower mortgage, and then putting the savings into an IRA. It would increase the chances of reaching the target retirement age without a mortgage.

Five to ten years before retirement tends to be the best time to capture the value of your property.

Living in a place that's cheaper than you can afford, rather than one that is exactly what you can afford, makes a big difference in retirement.

It is important to remember that even after you've paid for your home, you'll still have things to worry about, like insurance, maintenance, and property taxes. These costs should be factored into your plan.

While it's okay to pay off your mortgage with the goal of retiring without one, other debts need to be paid off first.

Credit card and car loan interest cannot be deducted like mortgage interest. Therefore, it is best not to lose sight of which types of loans should be prioritized and repaid first.

Bottom Line

One way to retire mortgage-free is to not take out a mortgage longer than the expected retirement age. Another way is to find a lower cost of living that allows you to have more financial freedom and live the lifestyle you want in retirement. Finally, if you want to stay in your current home, consider refinancing to a 30-year mortgage. Try to keep the payment as low as possible, so it doesn't affect your future cash flow as much.



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