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Should You Pay Down Your Mortgage?

Should I pay down my mortgage?

John Vogl

Is it time to stop putting money into your home?

More and more older homeowners are carrying mortgages into their retirement. The dollar amounts are much larger than they used to be, and the average loan term is longer by several years. Is this a crisis? That depends.

Normally, the larger your debt, the greater the risk that your retirement standard of living is likely to fall. But some retirees keep large mortgages by choice. Others find it possible to carry even an unwanted mortgage because interest rates are low. Either way, retirees have options for reducing the debt.

See also: When to pay off your mortgage

It's not clear that the recent surge in mortgage indebtedness is a risky trend, says Alicia Munnell, director of the Center for Retirement Research at Boston College. The most recent data comes from the 2013 survey done by the Federal Reserve. Between 2001 and 2013, the share of homeowners 65 and older who still had mortgages rose by 13 percentage points. Only 61 percent owned their homes free and clear in 2013, compared with 74 percent 12 years earlier. The median loan had 17 years remaining, compared with 13 in 2001. The story is similar for homeowners 55 to 64.

But this data reflects the housing bubble of the aughts, when optimistic spenders refinanced their homes and took out gobs of cash. It may be that your ardor for mortgage debt has cooled. We'll learn more, Munnell says, when the 2016 survey is published later this year.

So how do you want to handle mortgage debt when you get to your retirement's starting gate?

HOLD a large mortgage. This might make sense for people with high income who can deduct mortgage interest, who are comfortable with risk and who invest heavily in stocks. Your long-term returns are likely to beat your mortgage costs, after tax. If your income is modest, however, you're probably using the standard deduction, so the tax break on mortgage interest doesn't do anything for you. Your mortgage is simply an expense.

Pay down the debt faster. You might make double payments, or refinance into a 15-year mortgage. Prepaying is easiest when you're still working and earning a paycheck. Postretirement, it works best for people with comfortable incomes who can afford the extra monthly cost. But prepay with taxable income; don't take money out of a tax-sheltered retirement account. And don't tackle the mortgage until you've paid off any lingering credit-card debt.

Sell and buy something cheaper. You might buy the new place for cash, if you'll have enough money left over to live on. If not, take a mortgage with lower payments than you're making now. The sooner you act, the more money you'll save. And by the way, banks count Social Security income when evaluating your creditworthiness.

Sit tight. If you have only a few years left, just run it off.

Aim for being free and clear. Even many wealthy people get rid of their housing debt. If bad things happen, you know that the home is yours. And remember, property taxes and insurance premiums can continue to rise, long after your mortgage has been paid off.

Jane Bryant Quinn is a personal finance expert and the author of How to Make Your Money Last.

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