Fixed incomes make paying off debt extremely difficult. Over half of retirees carry some form of debt into retirement. Mortgage debt is especially hard during retirement because you’re bringing in less money. A large amount of people take funds from their retirement plans to cover debt payments. This causes their tax bills to increase, which in turn affects their day to day living. If you are going to carry mortgage debt in retirement, it’s a good idea to stop and consider your options. Here are some issues to think about if you plan to carry mortgage debt in retirement.
Principal VS. Interest
The most common type of home loan is a 30-year mortgage that includes principal and interest. The payment is split between several parts. A principal payment is the money going toward the actual loan amount. The interest payment is the money spent going toward the interest and depends on the rate you got when originating the loan. The split between principal and interest changes every month even as you carry the mortgage debt in retirement. In the beginning, the majority of your payment goes toward paying interest. Over time, the split in your total payment will level out and then, eventually, more will go toward principal.
Tax Season
Homeowners have certain benefit from a Mortgage Interest Deduction during tax season that renters do not. The amount of interest you pay towards your mortgage is deducted from your gross income. As a result, it reduces your federal tax burden. Keep in mind, this benefits new homeowners over homeowners further down the road as the amount of interest paid decreases. Of course, changes in tax laws affects this benefit.
Real Estate Tax Deduction
It’s common for mortgage payments to include escrow payments for real estate taxes and insurance. The portion of your payment for these items is held in escrow. An escrow account is simply a special account from which your mortgage servicer pays these bills. The state and local real estate taxes are deductible on your federal income taxes according to tax laws.
Tax Shortcomings on a Mortgage in Retirement
While you’re employed, the benefits of having a mortgage can be great. But once you retire, the benefits of mortgage debt in retirement can drop by a significant amount. Due to reduced income, your income taxes will most likely be lower. That could mean mortgage interest and real estate tax deductions will have little or no value at tax time. Additionally, if you are planning on making your monthly payment from a 4019(k) or IRA, you could even end up paying a higher tax.
Next Step: Reverse Mortgage
If you are age 62 or older and live in your home, you could qualify to reverse your mortgage. This program works by using equity built in the home. You are allowed to borrow money using your home as collateral. You do not have to repay the loan as long as you live there. The amount you can borrow is based on the home’s value and your lenders approval. The plan allows you to receive payments in a variety of ways. You can take it as a single sum, a line of credit, monthly payments, or a combination of the three.
Some advantages of a Reverse Mortgage are:
- Gives you access to cash
- Eliminates a mortgage payment
- Extends the life of other retirement savings
- Counseling for potential borrowers required
- The value of a reverse mortgage loan can increase
With the longevity of life expectancy increasing, retirement can easily last more than 20 years. As a result, cash coming into the house can slow down. On top of this, unexpected medical emergencies and other events can pop up making it hard to make ends meet. With this in mind, retirees find relief knowing a Reverse Mortgage Loan is there to help them out. Although it doesn’t change having mortgage debt in retirement, it provides a new approach.
If you would like more information about mortgage debt in retirement or a Reverse Mortgage, contact me.
Gary