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Sunday, March 25, 2007

Why You Should Pay Off Your Mortgage Before Retiring

I believe my readers are not yet near the age of retirement, but I thought if you are a Home Owner, the information I provide below should be of interest.

Have you ever thought about your age when your Mortgage is paid in full or the total amount you will pay out over a typical 30 year mortgage?

As a Home Owner myself, those thoughts have crossed my mind. I hope to be retired by the time my mortgage is paid, but there are many questions I need to ask myself if my house is not paid off when I want to retire. Will I have enough income each month to cover the mortgage plus other living expenses? What options will I have?

The amount I will pay out over 30 years is amazing, it is more than double what I originally paid for my house.

So Why should you pay off your mortgage before you retire?

More Americans are quitting the workforce without retiring their
mortgages. The most recent Federal Reserve survey shows that 32
percent of households headed by someone age 65 to 74 were
carrying home-mortgage debt.

That could be a mistake. Consider this scenario. Two retired couples
have income of $16,000 from Social Security and $24,000 from
individual retirement accounts.

The couple without a mortgage would be taxed on their IRA withdrawals,
but with the standard deductions, they would owe only about $600 a year
in taxes, leaving them with $39,400 in after-tax income.
The second couple took out a $200,000 30-year mortgage at age 50 that
costs $1,200 per month until age 80. The interest deduction doesn't help
because by the 16th year of their mortgage, just $8,400 goes to interest.
Added to other deductions, they will have little more than the $11,600
standard deduction taken by the first couple.

To match the first couple's standard of living, they have to make large
taxable withdrawals from their IRA. The withdrawals would drive up their
total income, triggering taxes on Social Security. They would need total
pretax income of more than $58,000 to have the same standard of living
as the first couple, and they would pay more than $4,300 in federal taxes.

Financial columnist Johnathan Clements says there's another problem
with carrying a mortgage into retirement. It limits the ability to tap into the
home's value through a reverse mortgage. He says the reverse
mortgage is a big financial backstop for cash-strapped retirees.

To pay off a $200,000 30-year fixed-rate mortgage at 6 percent with a
$1,200 payment: Add $50 a month to pay off the loan in 27 years. Add
$200 a month to pay off the mortgage in 21 years. Add $500 a month to
pay it off in 15 years.

Some people might argue that paying off your mortgage is a bad financial move. They claim in the long run you will get a higher return if you invest your money instead of making extra mortgage payments. There is a chance you will achieve that, but there's also a chance that you won't. Given the choice between a guaranteed savings of the 6% interest on their mortgage (compounded for 30 years), or the possibility of achieving some other rate of return (which may be higher or lower), conservative investors will take the safe bet.

Calculate your own time frame and payments to see what you could do.

Mortgage Payoff Calculator

If you want to use other Financial Calculators, go to Dinkytown (Best viewed in Internet Explorer)

Definitions: Source Dinkytown

Annual interest rate (APR):
The yearly cost of a mortgage, including interest, mortgage insurance, and the origination fee (point(s)), expressed as a percentage. Maximum APR is 20%.

Mortgage length (years):
Total length, or term, of your original mortgage in years. Most common lengths are 30 years and 15 years.

Original mortgage amount:
The original amount financed with your mortgage. Not to be confused with the remaining balance or principal balance.

Additional monthly payment:
Your proposed extra payment per month. This payment will be used to reduce your principal balance.

Scheduled payment:
Monthly principal and interest payment (PI) based on your original mortgage amount, term and interest rate.

Accelerated payment:
Scheduled payment plus additional monthly payment.

Total savings:
Total amount you would save in interest if you made the accelerated payment until your mortgage was paid in full

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