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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.
| Here are some things to consider as you look ahead
to retirement and the possibility of also retiring your mortgage. |
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| Tax is the biggest bugaboo |
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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. |
