retirement

Keep the mortgage or pay off the house?

Mortgage burnings used to be a ritual that families hoped to be lucky enough to perform. But times have changed. Now, growing older and retiring still includes another ritual: paying monthly on a mortgage.

As they head down the road toward retirement, many people are asking themselves: Should I use part of my nest egg to pay off the mortgage and gain a sense of security? Or should I leave my nest egg intact where it's earning interest and let my mortgage continue to provide me with a tax deduction?

If you decide to keep your mortgage in retirement, you won't be alone.

In 2004, 32 percent of households headed by someone age 65 to 74 were carrying home mortgage debt, and nearly 20 percent of households headed by those 75 and older had a mortgage, according to the triennial Federal Reserve Survey of Consumer Finances conducted in 2004.

About 25 percent of those of any age who considered themselves retired had a mortgage.

Is carrying a mortgage into the sunset something most people should seek to avoid? Or does holding onto a mortgage make financial sense, especially when rates are low and it is possible to earn a large enough return on money invested to pay the mortgage and still have a significant gain.

The answer isn't a slam-dunk. The right decision depends wholly on your personal financial situation.

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Keep the mortgage?
Here are some things to consider as you look ahead to retirement and the possibility of also retiring your mortgage.
Tax is the biggest bugaboo
1.Your mortgage's tax benefit
2.Social Security and taxes
3.Don't mess with your 401(k)
4.Don't mess with your 401(k), part II
5.The pros of paying off your mortgage.

Your mortgage's tax benefit 

An income tax deduction for homeownership is sacred in Americans' minds, but often the deduction doesn't add up to much. The financial advisers who tout its value probably live in expensive areas and own pricey houses, while the rest of us aren't so lucky.

Sure, mortgage interest and property taxes are tax-deductible, but the amount of interest and taxes typically paid on a median-priced home in the U.S. results in unimpressive tax benefits. If you live in the Midwest, are in the 25 percent tax bracket and you have 20 percent equity in your median-priced home, there are possibly no tax benefits at all.

Uncle Sam's standard deduction of $10,700 in 2007 for a married couple filing jointly -- available whether you own a home or not -- exceeds the value of the mortgage interest and tax deductions from the very first day of homeownership.

In 2006, the national median home sales price was $222,000. With a 20 percent equity stake and a 30-year mortgage loan at 6 percent, in the first year, the tax benefit is an estimated $1,195. The value of the deduction for a couple in the 25 percent tax bracket declines every year, until it in the 13th year, it's worth a grand total of $3.

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