Paying Off Your Mortgage before Settling Into Retirement

At one point in time, retirement meant enjoying your post-working years with a comfortable amount of money in the bank, collecting your retirement benefits or pension, and truly enjoying this time in your life that came as a reward for years of a job well done.  In today’s world, this scenario is unfortunately not the case for many individuals that are nearing retirement age, as the economy has left many hard working individuals with extra debt and financial stress, and many homeowners are refinancing their mortgages at a lower rate and carrying them into retirement.

While extending the loan in order to make smaller monthly payments is definitely helpful in some aspects, carrying this debt into retirement can lead to additional financial stress, especially if the amount of income you are bringing in is significantly lower than your usual paycheck.  It is definitely a good idea for homeowners approaching retirement age to look into paying their mortgage off early, as it allows for a variety of benefits.

Social Security Benefits and Taxes

Many retirees that carry their mortgage into their retirement may find themselves drawing from their retirement IRA or 401k in order to make payments on their mortgage.  When this happens, social security benefits are taxed, and the more you withdraw, the higher amount of social security tax you will need to pay.  By paying your mortgage off early, you will most likely be withdrawing less money from your IRA or 401k, in turn lowering the amount of tax paid on your social security checks.

Using Your Home as a Financial Safety Net

Paying off your mortgage before retirement can also be helpful in the event that you wish to take out a reverse mortgage in the future.  A reverse mortgage is a home loan that is specifically designed for homeowners aged 62 or over, and it allows for homeowners in good standing to draw on their home equity if they are in need of extra funds.

Reverse mortgages do not need to be repaid until the homeowners move out of the home permanently, and you can use the money for home repair, day to day expenses, or simply hold onto the extra funds as a financial safety net.  In order to qualify for a reverse mortgage, the original mortgage must have a low balance or be completely paid off, so paying off your mortgage before retirement will allow you this option in the future.

Lower Your Debt Considerably

Since the mortgage payment tends to be the highest monthly expense for most homeowners, taking steps to pay this debt off early can open up the door to financial freedom in your retirement.  Paying off your mortgage when you are still working will allow for overall lower monthly expenses, and when you are bringing in less income during retirement, this can definitely be helpful.

Weigh Out Your Options

If you have a few years before retirement, there is time to weigh out your options when it comes to paying off your mortgage early.  You will want to consult with your lender in order to determine the best route to go, as there may be certain fees assessed for early repayment.  By taking a few simple steps and negotiating with your lender, you will be able to take care of your mortgage in an expedited fashion, allowing for a comfortable and financially secure retirement.

Mortgage Interest Tax Break To End Soon?

America has become known over the past three decades or so as the country where you buy a home, and instantly qualify for a tax deduction.  However, in today’s economy and in the aftermath of the financial and housing crisis, the tax break is in the process of debate.

The Mortgage Interest Deduction

Currently, homeowners that pay taxes and itemize their deductions are allowed to deduct the amount of interest they pay on their mortgages up to $1 million, as well as up to $100,000 for home equity loans.  A home equity loan is different than a mortgage due to the fact that the homeowner uses their actual home equity as borrowing collateral.  Additionally, homeowners are allowed this deduction on a second home as well, another reason the whole situation is currently up for debate.

Due to the continual talks regarding tax reform as well as the loopholes that must be closed if there is any chance of reducing the U.S. national debt, mortgage interest tax deductions are up for a variety of alterations, and there is also the chance that this tax break for homeowners may be completely eliminated.

The Cost of the Deduction

The mortgage interest deduction is quite costly for the Treasury, approximately $100 billion per year in revenues.  At this point, a host of politicians are looking to have this tax break for homeowners limited to a tax credit, possibly have the deduction completely eliminated, or minimize the deduction for those in the higher income brackets, which President Obama completely supports.

While the President and a variety of politicians are supporting these possible changes, there are definitely those that are against it, so there is potential for a long battle ahead.

According to figures documented by the Reason Foundation, households that utilized the deduction saved approximately $83 billion in taxes. However, approximately only 30 percent of all taxpayers even utilize this deduction each year, which clearly points to the savings being taken by those individuals in the high income brackets.

Canada and Great Britain

Currently, Canada does not allow for a deduction from taxable interest on any loan that has been secured by a Canadian taxpayer’s home.  As a result of this, Canadian home ownership hiked up approximately 70 percent in 2012 alone.

In the early 1980’s, Great Britain began to  phase out the tax deduction, and it was totally eliminated in 2000.  However, home ownership is currently at a low, dipping to 63.8 percent from 72.1 percent in 2001.  The main reasons for the slump are said to be the requirement of large down payments, stricter borrowing criteria, and higher overall prices on homes.

Eliminating of the Deduction

In addition to eliminating the deduction, the proposed bill would also eliminate tax benefits for homeowners with mortgages over $500,000, and President Obama has also proposed eliminating the tax deduction for homeowners that are above the 28 percent income tax bracket.

Governor Sam Brownback (R-KS), proposed at the local level an elimination on the mortgage interest tax deduction for all state taxpayers. While the proposal definitely had promise, a recent survey stated that approximately 63 percent of Kansas state taxpayers are opposed to this idea.

This is the type of public reaction that truly shows how hard it may be to actually make this change.  While phasing out these deductions will not have much of an impact on anyone except the 30 percent or so that actually utilize them, the battle may still be long and drawn out, simply due to the fact that many people simply do not like change, especially change that affects their bottom line.