I've been helping people save and invest for more than two decades. In that time, I've come to understand that one of the best routes to financial independence is to enter into retirement without a mortgage.Not only will you require substantially less income to survive, you'll also be subjecting yourself to significantly less stress.But if this is all true, why do so many people reach retirement age and still carry a huge mortgage?
Alex Slobodkin | E+ | Getty Images
First, there's the oft-repeated myth that the tax deduction for home mortgages is a key building block of wealth. I'm all for tax deductions, but that tax deduction is allowed only when interest is paid by the homeowner. And the cost of the interest will always be greater than the tax savings. Here's an example: Let's assume someone has a marginal tax rate of 35 percent and pays $10,000 per year in interest charges. A tax deduction can be taken for the interest paid, but the tax savings for the deduction is only $3,500, leaving the homeowner on the hook for the remaining $6,500.Read MoreAmerica needs a financial wake-up callSo technically, yes, the taxman received $3,500 less, but the homeowner is still poorer by that $6,500.The second reason so many people retire with mortgages is that they've been convinced that their home's equity shouldn't just sit idle. I cringe when I hear or see ads encouraging people to raid the equity in their homes.Using a home loan to take on debt is not unleashing equity—not even close. It's putting yourself into debt and holding your home hostage as collateral.
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The sad truth is that people squander the equity in their homes to buy all sorts of unnecessary things. While some borrow to finance other investments, the majority do so to support their lifestyles.I've seen people who have lived in the same home for 30 years and hit retirement with a home mortgage two or three times larger than what they originally paid for their home.A fact so many people seem unwilling or unable to understand is that a home is not an ATM.Read MoreMy bad! I was wrong about rising ratesYou can't just "withdraw" equity like you can your savings. Equity isn't real—until you sell your house. It's merely a perception of current value. So the only way to monetize equity is to either sell your home or take on additional debt—and the interest on the loan that goes with it.A third reason so many retirees have mortgages is that, as interest rates have declined these past 30 years, people have refinanced to take advantage of the lower rates.
Starting all over
There is a time and a place for refinancing, but by doing so, many people just end up extending the balances and durations of their loans.That's because there are only three things that happen when people refinance, and two of them are bad: First, they may pull a little cash out to pay off other debt. Then, they borrow to buy stuff they may not need, and finally, they wind up with a fresh 30-year amortization period.So even though they might have already lived in the home for 20 years, they may still have 30 years left on the mortgage.Read MoreHow to best invest in 401(k) plans, IRAsOne of the best ways to deal with a home mortgage is to match your home payoff date with your retirement date.Forget just sending the minimum mortgage payment each month and dragging the loan out for 30 years. Instead, figure out how to have your home paid for by the time you retire (there are many free online tools to help you with this) and then be determined to do what's necessary to make that happen.
Here's an example: Let's say you're 52 years old and plan on retiring at age 66 and your home loan has 27 years remaining. If you make only the required mortgage payments, you'll be age 79 by the time your mortgage is retired. While in the short term you might appreciate the jump in your disposable income (when the lower mortgage payments commence), wouldn't it be better to have the advantage of significantly higher cash flow in your "younger" retirement years?Because people who own their homes outright almost never lose them, it's just common sense to work to substantially lessen the expense of your post-work years by amortizing your mortgage payments so that they end when you retire.Read MoreDon't pay high costs of market hypeWhile I've covered some of the economics of it, what about the emotional benefits of a retirement without a mortgage?Perhaps the most underrated aspect of paying off your home is the peace of mind it provides. People without mortgages tend to worry less about financial markets and the economy.
"With a little belt-tightening, a majority of Americans can indeed retire without a mortgage."
No matter what happens or how bad things get, they know they'll have a roof over their heads.Of course, there are people who will simply not be able to pay their home off before they retire. Even though I believe that with a little belt-tightening, a majority of Americans can indeed retire without a mortgage, if it's simply not possible, then the goal should be to get the payments as low as possible once somebody is about to retire.Read MoreTips for avoiding the wrong advisorThis can either be done by refinancing or, in some cases, using a reverse mortgage to eliminate those payments altogether.So the next time you're encouraged to pull cash out of your home, don't do it. It might make life a little easier right now, but you'll pay the price for it when you are older and want to start taking life a little easier.
Scott T. HansonCNBC Contributor and senior partner and founding principal of Hanson McClain Advisors
Author:Mike Siers Phone: 252-489-3861 Dated: July 17th 2014 Views: 751 About Mike: Mike Siers is in the top 1% in the Nations top Privately owned Real Estate company, Howard Hanna. W...
About Outer Banks Real Estate Mike and Stacy Siers Howard Hanna
We could give you the scripted bio, but it is the age of Google. Believe me when I say if you are online, you can be found. I want to tell you what you may not know.
Stacy and I have been together for most of our lives. We enjoy being around each other so much we work together. I like to say she keeps me balanced. I have been fortunate to work for many people and companies throughout the Mid Atlantic region and feel that experience has helped me understand people and situations. I have been doing sales for about 20 years, construction during 10 of those years and have managed a few companies along the way. Stacy, operated a HVAC company, managed retail and restaurants. Stacy started in Real Estate in 2008, not the best time if you dare to remember the real estate crash. She motivated me to get my license in 2009 and I started in 2010. I looked at the bad real estate market as an opportunity. A time to learn the market from the bottom up. A time to learn how to sell real estate when no one could buy it. In one of my past jobs, I learned the who, what, whens and hows of sales. I could move products! When I bought my first house out of college, I learned this was one of the most important purchases I would ever make. So when we work with clients, it is about them. We want to know why you are looking, how you want to use the house or what you are selling. What memories you have made from this house. We believe real estate is about people and relationships. We are fortunate to build friendships through real estate. It usually means we go to a lot of dinners in the summer when folks are down. (I really love that part)
The wrap up, Stacy and I won't sell you a house on The Outer Banks of North Carolina. We will work with you, share our knowledge, provide facts and dig for information on every home you are interested in and hopefully grab a bite to eat and share the memories you are making!
"August 24, 2013.....
Subject: Michael P Nolan, NC Real Estate Broker.....
Over the past 10 years I have known Mike as my real estate broker, and then as a family friend. As my broker, Mike made the process of selling my property a very easy process. From start to finish, all details of the transaction were done with complete professionalism. Since then, Mike has continued to be a friend of the family. Rarely do you meet and work with someone that continues to care after the work is done, but Mike is there always with a helping hand. His real estate experience on the Outer Banks for over 20 + years has been very successful, with the main reason, Mike’s determination to help his clients needs and make sure that they are protected in this ever changing real estate industry.
I highly recommend Mike Nolan as a real estate broker to help both buyers and sellers looking for property on the Outer Banks of NC. His knowledge and experience are the mark of a true professional. For the security of your investment, you can trust Mike.
Ms. Janet D. Anderson
Kill Devil Hills, NC