Carrying a Home Loan Into Retirement?

Start with this question: Should your goal be to pay off your home loan so you can live mortgage-free in retirement, or instead, should you aim to reduce your monthly loan payments, thus freeing up cash that can then be used for other things?

If you have a large savings nest-egg and a modest mortgage, go for the loan payoff. You might also think about trading down to a smaller home or, alternatively, work part time until you're rid of the mortgage.

One scenario, if you have cash sitting in a money-market fund held in a regular taxable account, also consider using these savings to reduce your loan balance. Your mortgage may be costing you just 6% and the interest might be tax-deductible, but your money-market fund is likely yielding only 5% — and you have to pay tax on that income.

One thing you DON'T want to do is cash out a 401(k) to pay down debt. A big 401(k) withdrawal would likely trigger a huge income-tax bill. You'd be better off slowly tapping your 401(k) or IRA to make your regular monthly mortgage payments. That way, you would also continue to enjoy the mortgage-interest tax deduction.

There are other options. If you don't think you'll ever get to live mortgage-free, consider getting the mortgage payment down as low as possible by refinancing or trading down to a smaller home. You might even refinance again later in retirement, further shrinking your monthly payment by extending your loan over 30 years.

Do you have any other suggestions or comments you might add to this article about carrying a home loan into retirement years? We'd love to hear your feedback. Leave us your comments by clicking the comment link below.

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