Many people get so excited when they retire and get to pay off their mortgage. This has become a thing of the past since many people now have mortgages well into their retirement age. During the last real estate explosion, many older people bought homes to upsize or purchase their dreams homes and even relied on the equity they had in their homes to purchase other items they needed, including paying medical bills.
Due to the recession, many people are wondering if they should pay off their mortgages versus to continue making the monthly payment. There is not a simple answer to this for everyone since everyone has different issues within their lives they face. There are several factors to consider so you can answer this question.
To pay off the mortgage requires a lump sum using your savings. The rule for paying off the mortgage is if your after tax interest is lower than the expected after tax from your investment then keep the mortgage. Extending your investment incomes has the benefits of lower interest. In other words, keep the mortgage and the interest rate will be the greatest benefit to you.
Paying off the mortgage with an 8% interest rate could make sense if you have money in a money market account earning 2% interest since you are not earning money on the savings. Make sure you leave enough money to continue to have a comfortable living situation if you do pay off the mortgage. Also, remember to have money reserved for unexpected situations such as medical bills and auto expenses.
Do not assume that once you pay off your current mortgage you can then use the equity for a line of credit. Due the economy, home equity lines of credit are hard to get when you need the money in the future. The lines of credit also have a higher interest rate the current mortgage. If you really need money fast, consider taking out a reverse mortgage but it has higher fees for this type of loan.
You can also consider using the cash from your taxable savings accounts to pay off the mortgage. It could possible place you into a higher tax bracket if you use the savings so seek advice from a financial representative before making this decision.
One option for a lower mortgage payment is to downsize your home to a less expensive home that you purchase with the proceeds from the sale of your current home. If this is not an appealing idea, then take the other option of paying more on the monthly mortgage payment so you can pay off the loan sooner. The additional money paid on the loan is applied to the principal of the loan instead of the standard payment being applied to the interest first then the principal. Paying more money on the payment speeds up the possibilities of having a shorter term for the mortgage.
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