September 19 — The Federal Reserve reports that almost 19% of families headed by someone 75 or older have a mortgage – up sharply from 10% in 2001. Today’s Wall Street Journal article provides some practical tips if you are in the situation of retiring before your mortgage does. You can use a calculator to determine your mortgage payments. One of the common dilemmas that many people have is what to do if you have more savings than mortgage – should you pay it off quickly and forgo the home mortgage interest deduction? Jonathan Clements suggests that you take the plunge and use some of your savings in that case to reduce your mortgage. You will lose the deduction, but paying off is a better option because your loan rate is higher than your savings rate, and most interest you earn is taxable anyway.
Clements cautioned about using 401k savings for this purpose, since you will have a tax penalty for taking out the money.
He also went through various scenarios including buying an annuity with money from your 401k to insure you will be able to make payments in future years. To do this properly you need to pay for the annuity directly from the 401k. Lastly, he laid out the situation where you still have a big mortgage and a long way to go to pay it off. Often the best strategy there is to sell your home and move to a smaller one to lower your monthly payments and insure your fiscal health. Of course your ability to sell your home in the current weak market comes into play, but assuming you purchase a new home quickly you will probably make up for whatever downside the market has now with a better deal on the new house. Wall Street Journal article on Retiring with a Mortgage.
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