The average American has to wade through years of hard work in order to own a home of one’s own. Indeed, very few have enough resources or the cash to pay even make the required down payment on a mortgage. In fact, most Americans understand that paying for a home loan has long been a necessary sacrifice to achieve the American dream. In the past decades, it was customary for the average mortgagor to pay off their homes before retirement. But recent data reveals that many of today’s homeowners will have to make this sacrifice a bit longer.
Carrying mortgage to retirement
Per the Consumer Financial Protection Bureau, the percentage of Americans aged 65 and above who carried a mortgage to retirement from 2001 to 2011 increased from 21 percent to 30 percent.
For homeowners aged 75 years and older, the situation is even worse with the average jumping from only 8.4 percent in 2001 to more than 21 percent in 2011.
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Instead of enjoying their golden years, more Americans have to delay retirement or sacrifice a part of their retirement savings to continue paying off their mortgages. This is a stark contrast to the retirement picture that they have been promised before a half-century ago.
What factors could have contributed to this phenomenon?
Increasing home prices
Home prices have been continuously driven forward in the past few years by declining inventory. The high cost of construction labor and materials, along with the refusal of boomers to move to their second homes and landlords’ lack of incentive to sell have all squeezed inventory to the lowest figures. This has caused a surge in prices that is barely paralleled by the increase in wages.
While home values may have increased, giving the retiree population the opportunity to sell and downsize, many of them are also finding it hard to find a property that gives them the same value as their current homes, thus the resistance to sell. Selling and buying a new home does not necessarily give them a better deal, on top of the hassle of acquiring another mortgage or moving into a new home – or renovating a new one to accommodate their old-age troubles.
Stuck in debt
Although rates are projected to rise, it remains historically low, tempting many mortgagors to tap into their equity reserves to access some of that much-needed cash. While refinancing could be a tactical financial tool, it can extend the life of a loan and can sometimes even trap some homeowners in a debt cycle.
Just this October, Fannie Mae issued a report recognizing the problem.
“The leading edge of the large baby boom generation has reached retirement age with a greater likelihood of carrying housing debt, raising concerns about their retirement financial security,” per the report. “The oldest boomers, who were aged 65-69 in 2015, were 10 percentage points less likely to own their homes outright than were pre-boomer homeowners of the same age in 2000.”
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Experts give out some tips that mortgagors could use to pay off their homes into retirement.
- Make one or two extra payments per year. Although gradual, this strategy can actually help you reduce up to five years off the life of your loan and can help save thousands of dollars on interest payments.
- Make biweekly payments. A biweekly mortgage plan allows you to pay an additional mortgage payment each year. An extra payment goes toward paying the principal of the loan. Since the mortgagor reduces the amount of the loan balance quicker, they are also reducing the interest charged on the loan. This strategy enables the mortgagor to pay off his or her mortgage up to eight years earlier with about 23 to 30 percent total interest savings.
- As much as possible, avoiding withdrawing from your retirement accounts. Doing so can result to hefty tax penalties. Wes Moss, reputed financial expert advised that if you can pay off your home loan with no more than a third of your regular savings fund, then you should do so.
Retiring with a mortgage cannot only leave you anxious; it can also easily deplete whatever amount you were able to save to fund your golden years. Take control of your finances! You deserve to have the peace of mind you have worked so hard for. Follow these tips, or speak with your financial advisor to restructure your finances with a better retirement situation in mind.