Ways to Pay Off Your Mortgage Early and Safely Ease into Retirement

A decade ago, every non-retirees anticipated their retirement with optimism. This, however, is different in recent years, as over 50 percent are scared they will be unable to live a comfortable life after retirement.

Some retirement anxieties they fear include high healthcare costs, increased inflation, running out of money, and too much debt.

Retirement anxiety is worse for people with mortgage payments. Even though some could afford an outright mortgage payment, they fear running out of money after the repayment.

On the other hand, early mortgage payment is only ideal for some.

How to determine if to pay off a mortgage early

Whether it makes financial sense to pay off a mortgage early depends on income, mortgage size, prepayment penalty, savings, and mortgage interest deduction.

Paying off a mortgage with your income and savings may deplete your retirement fund. You may be unable to cover emergency expenses and medical bills. However, it is okay to pay off the mortgage if you have more than enough for mortgage repayment and living expenses.

If your money is invested in a financial asset and the Return On Investment (ROI) is lesser than your mortgage interest, withdrawing your money to pay off the mortgage might be a good decision.

There are lots of benefits that come with homeownership, and one of them is the opportunity to deduct your mortgage interest payments on your taxes. Paying off your mortgage means you cannot further enjoy this privilege.

Meanwhile, there are alternatives to paying off your mortgage early without depleting your retirement savings.

Reverse mortgage

A reverse mortgage is a home loan available to homeowners aged 62 and older. It is typically for people who have paid off their mortgage, as the loan is based on your home equity.

The loan can offset a mortgage and does not require monthly payments. It is repaid when the borrower no longer lives in the home.

Depending on your current debt, a reverse mortgage can provide you with liquid equity, which you can use to cater for emergency expenses and medical bills during retirement. Use a Reverse mortgage calculator to estimate how much you are eligible to borrow for proper planning.

Home Equity Loan

A home equity loan might be a good option for homeowners who have repaid a considerable percentage of their mortgage principal.

Since the home secures the loan, it usually has a lower interest rate when compared with unsecured loans.

You can use the loan to pay off your existing mortgage and the remaining cash to fund your retirement.

The loan term is usually about 20 years, but unlike a reverse mortgage, you must make monthly payments.

Mortgage forbearance

Mortgage forbearance is an agreement between a lender and a borrower experiencing a financial setback or loss.

During the mortgage forbearance, the lender will pause your monthly payment for the duration of the agreement, after which you may have to pay all missed payments and resume regular payments without penalty.

Some lenders may agree to reduce the monthly payment during the mortgage forbearance instead of a total pause.

It is a good option for people who have their money tied down in an investment, have recently suffered a loss of income, or have a home damaged by a natural disaster.

Refinancing

Mortgage refinance is taking out a fresh mortgage loan to replace the existing one. The aim is usually for lower rates and longer loan terms. To qualify for a refinance, you will need adequate home equity. Home equity is your home value based on current market estimation minus the amount you still owe on the mortgage.

Experts recommend refinancing if it can lower your rate by one percentage point. Another factor to consider is the duration of time it will take you to reach the break-even point after the refinance.

You may also refinance to get a longer term to ease into retirement. This will reduce your monthly payment and afford you enough funds for other expenses. However, this might mean you will pay more interest if you calculate the total payment after the new loan term.

Consider refinancing cons, such as additional costs, before choosing this option.

Recast your mortgage

Mortgage recasting, or loan reamortization, adjusts your loan balance for a lower monthly payment.

This strategy is used when you have a large payment that may need more to pay off the loan. After making the large payment, you can negotiate with the lender to reduce the monthly payments afterward.

It usually costs between $200 and $300 to recast your mortgage. If done right, the convenience and peace of mind accompanying lower monthly payments outweigh the mortgage recasting fees.

Get rid of mortgage insurance.

Some conventional and Federal Housing Administration (FHA) backed loans require mortgage insurance. This can significantly increase the total monthly payment.

Mortgage insurance protects lenders from losing money in case you default. For FHA-backed loans, you will pay a monthly mortgage insurance premium (MIP), about 0.15% to 0.75% of the loan amount annually.

You may refinance your mortgage to a conventional loan to eliminate FHA mortgage insurance.

Likewise, homebuyers who cannot make a 20 percent down payment for conventional loans will have to pay private mortgage insurance (PMI). Before 2017 and during the COVID-19 pandemic, PMI was tax-deductible, but not anymore.

If you can afford it, pay your mortgage up to 78 percent of the original home value to get rid of PMI. Homeowners can also get a new appraisal for their home, especially if the home value has appreciated since they took the loan.

Renting out unused rooms

This strategy is only for some. First, you must have enough space and another extra you can rent. This could mean converting your home’s basement into a separate apartment. It would help if you also were comfortable living with someone else.

Also, discussing this with your lender and researching the residential rental laws in your area is recommended.

The extra cash from renting out your spare room can be used to increase your monthly mortgage payment. This will mean you can complete your mortgage payment early. Please discuss this with your lender before increasing the monthly payment to ensure it does not attract any penalty.

Suppose the income continues after completing your mortgage payment. In that case, you can fund your retirement lifestyle and cover medical expenses.

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