Buying a new house is a significant event in everyone’s life. When people plan to buy a house, they raise several questions like “how will I afford to pay a lump-sum amount of money” or “how much house can I afford.” In order to answer all your questions, it is to say that taking a mortgage loan is the best possible option to raise fund for buying a new house. You need to make monthly payments for your mortgage loan and interest will be charged on the loaned amount until it is paid off. Some people prefer to pay off their mortgage as soon as possible, while some continue paying their home loans during the retirement years. As per the recent study of Boston College’s Center for Retirement Research, almost all households are quite well off, and have sufficient assets to pay off their loan. But retirees say that they hold on to their mortgage debt in order to get tax deduction or to maintain liquidity. But before you decide to carry your mortgage loan into retirement, you must consider several factors associated with it.
According to the Mortgage Bankers Association, the fixed interest rate of mortgage is currently 5.17 percent. Now some retirees hold their mortgage loan back with the hope of getting a higher rate of return elsewhere. But in most cases they can never beat that interest rate in low-risk investments like bank certificates of deposit, treasury bills and treasury bonds. There is no guarantee that mortgagees will earn more in stock investment than in mortgage.
People prefer to hold back on their mortgage loan with the hope of tax deduction. It is true that the interest you pay on your mortgage is tax deductible, but it involves certain criteria. If all your itemized tax deductions, including mortgage interest, charitable contributions, and state and local taxes, add up to more than the standard deduction then you will get the benefit of tax deduction on your mortgage. The standard deduction is $11,400 for married couples and $5,700 for singles in 2009. But in general, retirees usually do not have $11,400 or more of itemized items, so it is more sensible to pay off the mortgage loan before retirement.
Retirees are most likely to pay off their mortgage loan using their IRA. But withdrawals from IRAs are taxed as income. So if you withdraw a large sum from your IRA you need to pay hefty tax. For instance, if you need $100,000 from your IRA to pay off the mortgage, and if you are under 28% tax bracket, then you have to withdraw $128, 000. Moreover, if you withdraw money from an IRA before falling into the age of 59 1/2, then you also have to pay 10 percent withdrawal fee. So considering all these factors, it is better to pay off your mortgage loan with after-tax investment, before you retire.
Hence, it is to be concluded, considering all these factors, it is always advisable to pay off the mortgage loan as soon as possible, rather than carrying them into retirement.