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Prepay Your Mortgage

Getting rid of housing debt is way harder once the paycheck ends

Prepaid Mortgages JBQ: Prepaid Mortgages Paying off your home before you stop working will lessen your expenses in retirement.

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Paying off your home before you stop working will lessen your expenses in retirement.

En español | The pressure of debt repayment lies heavily on Americans in midlife and later. Surprisingly, it's not consumer debt. What's squeezing the budget as families enter retirement today is primarily mortgage debt.

Payments on home loans chewed up 7 percent of income on average in 2013 for people 55 and older, the Employee Benefit Research Institute (EBRI) reports. That's up 35 percent since 1992, when the boomers' grandparents retired. Back then, only 24 percent of this age group still carried mortgages, EBRI's Craig Copeland says. Today 39 percent do, and in much higher amounts.

See also: Student loans and Social Security claiming

Having a high level of mortgage debt, relative to the size of your income, gets especially risky when your paycheck stops and you have to make monthly payments out of the money you've saved. That's why so many preretirees try to pay off their mortgages in advance. How easy that is to do depends not only on the size of your income but also on the type of loan you have.

Prepaying a fixed-rate mortgage is pretty simple. All you have to do is add enough extra money to each monthly payment to wipe out the loan by the year that you want to retire. As an example, say that you took a $300,000 loan for 30 years at a fixed interest rate of 4 percent. The loan has 20 more years to run. If you want to retire mortgage free 13 years from now, you can do it by paying an extra $500 a month. To test various prepayment schedules, use AARP's mortgage payoff calculator or ones at mtgprofessor.com or bankrate.com.

When your mortgage carries an adjustable interest rate, however, your prepayments have to be adjusted, too, says Jack Guttentag, founder of mtgprofessor.com. A fixed amount, such as $500 a month, will reduce the size of your loan. But every time the interest rate changes, the lender will stretch out your remaining payments over the loan's original, 30-year term. Your monthly payments will go down but you'll still be in debt when you retire. To burn the mortgage earlier, you will have to increase your prepayments after every rate adjustment. Pay the $500 you planned on plus enough to make up for the amount by which your scheduled mortgage payments dropped.

See also: When to pay off your mortgage

When you have an adjustable mortgage that you want to retire by a specific date, calculating your payments becomes an annual process. First, decide how soon you want to pay the mortgage off — say, in 12 years. A mortgage calculator will show you what you have to pay each month in the current year. When the interest rate changes, fire up the calculator again. Enter the remaining amount of the loan, the new interest rate and your target retirement date. You'll get a new monthly payment, higher than the last. Do the same in each following year.

For something less exact but pretty close, set your first mortgage payment (plus the extra) as if you had a fixed loan, never reduce it and check your progress every couple of years.

Before you start a prepayment plan, however, consider what else you might do with that money. Top of my list would be paying off consumer debt and raising your contributions to a tax-deferred retirement plan. Both actions bolster your finances and will make monthly mortgage payments easier to cover.

If you can't afford to prepay your mortgage and still want to retire with a paid-up home, consider downsizing earlier rather than later. You might buy a condo for cash or rent it and put the proceeds of the sale into an investment account. No more mowing lawns. You'll declutter your life and relieve your retirement budget, too.

Jane Bryant Quinn is a personal finance expert and author of Making the Most of Your Money NOW.

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