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Thinking About Paying Off Your Mortgage Before Retirement? Consider This First

6:46 AM, May 1, 2013   |    comments
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WASHINGTON (WUSA9) -- Wouldn't it be great to pay off that mortgage before you retire?  But that might not be your best financial move.

Jane Clark, from Kiplinger's Personal Finance, gave us some steps to consider first, including paying off our consumer debt (see the list below).

"You're probably paying a lot more for your consumer debt on your credit cards than you would be on your mortgage. Mortgage rates are probably below 5% now and so you could be paying 13%, 14%, 15% on your credit card balance. It doesn't make sense to keep that debt and pay off your mortgage," said Clark.

She also suggested before devising a plan to pay off our mortgage before we retire, we should also evaluate our retirement funds. 

She explained, "This is your last chance to fuel those accounts, take advantage of the tax deferred accounts and so you don't want to take your eye away from the ball on your retirement accounts. You want to have a chance to continue to keep them growing."

You can't take out a loan to fund your retirement. You can do that for your mortgage so might as well use that cheap money. We also should keep a reserve fund, that rainy day fund in case anything bad comes up. Why should we be fueling that?

Clark said, "You don't want to be house rich and cash poor. You don't want to find yourself in need of a major amount of money. Say you have a medical emergency. If you've sunk everything into paying off your mortgage, then you're really going to be stuck."

In tip number four, Clark says weigh the return versus the risk. "If your investments are earning less than 1% in cash accounts, then it might make sense to retire your mortgage with you paying maybe 4%, 5% on but if you think you can actually make more on your investments than you're paying on your mortgage, you might want to let those investments grow," stated Clark.

Clark also says you should stay flexible. "Instead of paying off your mortgage all together, you could refinance to a shorter-term mortgage, say 15 years. The problem with that strategy is that it's not as flexible as just hanging on to the 30 and prepaying when you can. If you locked in that higher 15-year mortgage, then you're kind of stuck with those payments," said Clark.

Here are the 5 tips:

  1. Pay off consumer debt
  2. Fuel retirement accounts
  3. Keep a reserve fund
  4. Weigh return versus risk
  5. Stay flexible

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