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How “Not” to Carry a Mortgage into Retirement

When you think about your retirement years, you might see yourself on a golf course, traveling and enjoying life without the burden of a job. This vision might also include a mortgage-free retirement. 

Paying off your mortgage before leaving the workforce might make sense from a financial standpoint, especially if you anticipate a decrease in income. Since your home is likely your biggest monthly expense, eliminating this bill can help stretch your retirement dollars, allowing for a more comfortable retirement.

If you’re not scheduled to pay off your mortgage until after you’re retired, here are a few strategies to get rid of this debt sooner.

1. Select a 15-year mortgage

If you decide to purchase a home later in life, a 15-year mortgage (or another short term) can accelerate your loan repayment and help you pay off the home before you retire, or you might only have a few years left on the mortgage after retiring. 

A 15-year mortgage can seem intimidating since you’ll pay a higher monthly payment. Rather than assume you can’t afford a higher amount, set up an appointment to speak with our loan experts at Cherry Creek Mortgage. We’re happy to discuss payment scenarios with you and help you decide whether a 15-year mortgage is doable on your current income. 

Keep in mind that choosing a 15-year term as opposed to a 30-year term doesn’t double your mortgage payment. For example, assuming a mortgage interest rate of 4%, the mortgage payment on a $200,000 house with a 30-year term is about $955 (excluding property taxes, homeowner’s insurance and mortgage insurance). If you were to purchase the same property with the same interest rate, but with a 15-year term, your mortgage payment increases to $1,479 a month— a difference of only $500. So although you'll pay more with a shorter mortgage term, this amount could be more affordable than you think. Additionally, a 15-year term may carry a lower rate than a comparable 30-year term product, and this can help further reduce the difference in payments between those two options.  

2. Make extra mortgage payments

Periodically making an extra principal payment also helps pay off your mortgage balance sooner. It might come as a surprise, but one extra principal payment a year can significantly reduce your interest payments over the course of the mortgage and potentially shave four or five years off your mortgage term. Now imagine how fast you could reduce your principal if you made “two” extra principal payments a year. 

If you have the extra income, make an additional mortgage payment every six months, or once a year on your mortgage anniversary date. Submit a separate check for the extra payment and write on the check “principal only.” 

3. Be smart when refinancing

Refinancing can lower your mortgage interest rate, reduce your monthly payment and help you secure new loan terms. A refinance can also reset your mortgage term for another 30 years, increasing the likelihood of carrying a mortgage into retirement. Not to say you shouldn’t refinance, but if you’re determined to pay off your mortgage before retiring, don’t refinance for another 30 years. Instead, refinance into a 10, 15 or 20-year mortgage. A shorter term might better align with your original payoff date, allowing you to take advantage of a more favorable mortgage without significantly extending your loan repayment.

Bottom Line

Our loan experts can help you achieve your home dreams. We offer a variety of solutions to accommodate our clients. So whether you’re looking to refinance or you’re contemplating a shorter mortgage term, we can answer your questions and help determine the right approach based on your circumstances. Contact us to learn more.