Managing Your Mortgage Debt

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OCEAN CITY – Historically, most Americans have paid for their homes by the time they reach retirement age and leave the full-time workforce. But many of today’s baby boomers have a strikingly different attitude when it comes to a mortgage loan.

"Homeowners are carrying more housing debt than ever, and are preparing to take much of that debt with them into their retirement," says Rob Mickler, a Vice President and Consumer Finance Specialist with Merrill Lynch.

In fact, the Federal Reserve’s most recent Survey of Consumer Finances reports that roughly one-third of households headed by a person age 65 to 74 carry home mortgage debt, up from 26% in 1998.

That willingness to take on debt could spell trouble for many investors’ retirement security, however.

The good news is that there are plenty of ways to keep your mortgage obligations under control while keeping you on track for your ideal retirement.

For many homeowners, paying off a mortgage before retiring is the smartest move — after all, doing so removes a large fixed monthly expense and frees up more cash. That makes eliminating or reducing your mortgage debt especially attractive if your estimated cash flow in retirement is uncertain. "You must review your mortgage debt in relation to the rest of your finances to see if your plan for retirement income will satisfy that debt," says Mickler. "If not, you should be thinking about eliminating the debt or reducing it, perhaps by downsizing to a smaller home."

That said, there are sound reasons to consider carrying at least some mortgage debt into your golden years — for example, if paying off your mortgage all at once would deplete too much of your cash reserves, force you to sell existing investments and generate big capital gains taxes or otherwise alter your retirement plan. Also, if you carry a mortgage with a low long-term fixed rate — as many homeowners who refinanced in recent years do — you might prefer to grow your nest egg by investing the additional cash the low rate affords you in a retirement account.

It also makes sense to consider your mortgage in relation to your overall portfolio, notes Mickler. If your investments’ expected overall rate of return over time exceeds the cost of your mortgage, you may come out ahead.

The upshot: The right move for you should be based on a review of your retirement goals, your expected income and investment returns in retirement and the amount and type of mortgage debt you currently carry.

A number of options are available to help you manage your monthly mortgage obligations and other finances, including a home equity line of credit (HELOC). By allowing you to borrow against the equity in your home, a HELOC can help you fund retirement expenses — such as the purchase of a second home or retirement property, education costs or home improvements — without having to sell your existing investments and potentially disrupt your portfolio.

Finally, some boomers approaching retirement might benefit by refinancing their current mortgage. For example, relatively short-term interest-only mortgages may save homeowners significant sums that can be redirected to retirement investments that have the potential to generate a higher return than the cost of the mortgage. Conversely, homeowners who expect to stay in their current residence for several decades might consider a long-term fixed-rate mortgage that provides greater predictability.

Take the time now to review your mortgage in relation to your retirement goals, and make any adjustments if necessary to help ensure that your financial strategy is set to deliver a comfortable retirement down the road.

(A Merrill Lynch Senior Financial Advisor. She can be reached at 410-213-8520.)

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