Mortgage payments are by far the largest line item on many family budgets. While there are benefits associated with having a mortgage, like tax deductions and building home equity, most folks look forward to the day they own their home free and clear.
In fact, there are significant psychological and financial benefits to not having a mortgage. In doing research for my book, “You Can Retire Sooner Than You Think,” I found that one secret of the happiest retirees was having their mortgage paid off, or being within five years of their last payment. When we hit retirement, our financial well-being can take a hit from continued home loan payments. By reducing or eliminating home loans in post-career life, we can set ourselves up for more financial security.
Let me share some of my life experience with mortgages. Over the years my wife, Lynne, and I have lived in several Atlanta neighborhoods — Vinings, Brookhaven, Virginia-Highland, and Lake Claire. Until recently, our home was in the Morningside/Midtown area. If we’ve learned anything as homeowners, it’s that houses take work. But in the long run, your investment almost always pays off.
Our Morningside home, for example, was an early 1930s construction. Although it had been renovated here-and-there over time, when we moved in it needed some serious TLC. Not only did the house desperately need updates, there were spaces inside that needed attention in order to be usable.
Case in point was the attic floor. We all know that Georgia summers can be unbearably hot. The attic would get so sweltering in the warmer months that it was virtually off limits. This was a major problem for us since we had gone from having two kids to having four. For our family, space was a priority.
We rolled up our sleeves and got to work on scheduling renovations. The process turned out to be disruptive, to say the least. During renovations, we had to move out and rent for almost a full year.
Sure, the upgrades took longer than we would have liked, but the final result was well worth the wait. After everything was completed, we moved back in loving our home even more.
The work we did was substantial, both to our home and to our mortgage. During the renovation, our house needed a roof lift, and this extra added to an already significant total cost. But we knew that the upgrades and updates would add to our overall mortgage balance before we started. The key was how we handle our mortgage going forward. Although we had a mortgage I felt comfortable with, I was eager to eliminate it long before I retire.
Now, for most people, this is a daunting task. We all want to pay off our mortgage, but how do we get there? According to a 2013 study by the American Community Survey, only about 20 percent of owner-occupied housing units were without a mortgage. But we know that “a paid off mortgage” can create tremendous peace of mind and retirement happiness. So, let’s make a plan and make it a priority.
Here are four ways to make it happen:
1. Focus on keeping your required mortgage payments at or below 15 percent of your gross monthly income. While the mortgage and real estate industries often cite 30 percent, this is an extremely aggressive number. Err on the side of affordability and go with the lower percentage.
2. Plug your numbers into an early payoff calculator to see how you can chip away at your mortgage. There are several online early mortgage payoff calculators, but Bankrate.com has my favorite. Using a calculator will help you determine how many years you can trim off your loan by paying $200 or $300 more a month.
3. Consider biweekly over monthly payment if adding a few hundred dollars a month to your payment doesn’t seem possible. This is an effective way to shorten the life of your mortgage. Simply cut your mortgage payment in half, and pay that amount every two weeks.
Here’s how it works. If your mortgage payment is $3,000 a month and you get on a two-week payment schedule, at the end of the year you will have paid an extra $3,000 because of the way the calendar falls. The best part is you won’t even realize you’re paying extra.
4. Use the 1/3 mortgage rule. This rule is simple: if you can pay off your mortgage using no more than 1/3 of your nonretirement savings, consider writing that check today.
For example, if you owe $40,000 on your home and have $150,000 in savings (not including your 401(k) or IRA funds), you are within the 1/3 rule. This means you can safely pay off your mortgage and still have a sizable cushion left over.
To be clear, I don’t recommend busting into your 401K or other retirement accounts to pay off your mortgage. The penalties, additional tax liability, and lost nest-egg growth aren’t worth it.
A word about rental real estate: While it’s wonderful to go into retirement with little or no debt, a mortgage for a rental property might be justified, but only if that investment has the potential to provide a solid return.
Paying off your mortgage early, especially before or during your first years of retirement, will give you the peace of mind to sleep better. Financially, the albatross around your neck disappears. What’s more is that you’ll be in a position to spend more money on the things in life that you cherish, rather than making payments to the bank.