It’s hard enough to save for retirement let alone pay off the mortgage too. Most of us end up retiring with a mortgage. I sure did, our parents did, and frankly almost everyone I knew did. At the time of my first early retirement we had been in our home 14 years. The mortgage was paid down 40% from when we bought the home. Here is the strategy I used and considered to help us manage our housing costs in retirement.
Four Strategies To Consider When Retiring With a Mortgage
#1- Refinance to Lower Your Monthly Payments
Obviously if someone is considering retiring with a mortgage the numbers have got to line up. Simply running our budget numbers including the monthly mortgage payment through a retirement calculator like FIRECalc can provide some assurance. I retired early and certainly made sure that I could afford to retire with my mortgage payment.
My strategy was to reduce my monthly mortgage payment to allow for more cushion in my retirement budget. I prefer 30 year mortgage loans with a lower monthly obligation and then making extra payments when I can.
We bought our home in 1995 with an 8% interest rate and a $1185 monthly payment. We did refinance a couple of times to take advantage of lower rates over the years. Each refinance was for the existing mortgage balance and pushing it out again for 30 years with the lower interest rate. This always resulted in a reduced monthly payment.
I used this same strategy the month before I retired to lower the payment again. With our last mortgage refinance our interest rate was 3.75% with a monthly payment of $744. This made retiring with a mortgage much easier on my retirement budget.
By refinancing your mortgage before retiring the refinancing process is smoother. The bank was able to easily perform my employment verification and verify my income. I did not mention my intention to soon retire, nor did they ask.
#2- Downsize to Reduce Housing Costs
Our plan was that we stay in our existing 2 story empty nest for several years and then later sell and downsize. Retiring with a mortgage doesn’t mean it has to be with us the rest of our lives. The plan was to later buy something with our equity for a mortgage free or almost mortgage free final home. A smaller home should also provide lower utility costs, taxes, insurance, etc., to give even more retirement budget cushion.
For some with a large mortgage payment, completing this move would be highly considered before retiring. In our case we still enjoyed where we lived and could manage the mortgage payment in retirement. That is why this is part of our delayed strategic moves and I am glad we waited.
We have recognized that our views on housing have changed. I believe they will change even more as time goes by with our aging. When I retired the only thing we considered was buying a smaller ranch home. Now we are opening up to RV, Condo, and even just renting. It is important to have a long term view and plan. But recognize that things may change over time. I keep our options open.
#3- Move to a Less Costly State, City, or Town
This strategic step is also part of our delayed retiring with a mortgage housing strategy. We will consider relocating somewhere less expensive if and when the time comes to sell our existing home. The town we live in is beautiful and with lots to do. Because of that it is sought after and has become a higher cost area.
Not knowing the future, we keep this as a strategic consideration. A lot will depend on the cost of living and our budget at the time. We keep an open mind to moving to a State that has no or lower income tax, a different town, or even a different retiree welcoming country.
#4- Pay Off the Mortgage with Retirement Job Income
I had always planned on retiring early and often. Meaning I would always remain open to opportunities that I had passion for or was interested in learning and doing in my retirement. My retiring with a mortgage allowed for my retirement funding to cover it in my budget. That means that any income I earn is extra. With this strategy I am able to divert all my retirement job income to the mortgage.
I did put this strategy into action after landing a sweet retirement gig. I paid off the mortgage within 18 months. Even if a retirement job didn’t pay enough to clear the mortgage, all money paid towards the mortgage would be like an investment. Where it enhances the benefits provided in our delayed retirement housing strategy moves of downsizing and/or relocation later on.
Now that I am in my 2nd early retirement it is nice to be mortgage free. However my retiring with a mortgage delayed strategies of downsizing and relocation are still fully in play.
The strategic goal is having a plan that manages our retirement housing by offering us financial flexibility. It’s all about looking for ways to stretch our retirement dollars in the best way possible in a place we WANT to call home.