For Thanksgiving, Home Is Where The Heart Is – But How Much Of Your Retirement Capital Should Be Locked Up There?
The idea of taking an earlier retirement has grown more attractive and more popular over the last several months, due partly to the “Great Resignation” trend as people have been recalibrating their priorities in the wake of the pandemic. Now, with more people considering early retirement, there are new questions about monthly expenses and how life-long dreams can be fulfilled in the most financially responsible ways.
This latest Real Estate Roundtable feature explores two mortgage-related financial planning questions that exemplify two of the most common types of queries that financial professionals of all backgrounds are likely to get from pre-retiree clients – Especially clients considering a big change that likely wasn’t in the cards just a few years ago.
And it’s fitting that our advice should come from Mike Socha, President and CEO of The Socha Lending Group in Denver, Colorado. For the past 16 years, Mike has built his business by providing a “consultative approach to each borrower,” helping them understand the nuances of their choices and how best to live their dreams, even as they change.
The Socha Lending Group is licensed to operate in eight states and has plans for future expansion. The team leverages cutting-edge technology and the “Socha Lending Way” to help deliver their brand of personal service – which is to say, there is no one answer for every borrower, and that came through in the answers to this month’s questions.
Q: I have a 20-year fixed mortgage on my home at 3.5% – and I’m about halfway through that period. There are no pre-payment penalties on principal. Should I pay off my primary residence before I retire?
Mike Socha: As many people enter the next phase of their life, retirement, there is always the question of “Should I pay my home off or keep my existing mortgage?” Using the example from this question, I think the answer is, “It depends.”
There are many factors to think about when considering your specific situation. The first one should be the opportunity cost of the money. If you currently have the funds you would be using in some sort of investment earning interest at a greater rate than your mortgage interest rate, it makes more sense to keep it there.
Additionally, you can look at your current tax situation and factor in the potential money saved by having the interest as a tax deduction. If you have other debts, such as credit card debt, it might be wise to look at paying off your higher interest rate debt first before paying off your mortgage.
The final thing to consider is your plan for retirement income. If you have yourself set up on a fixed income, would it be easier for you to pay the mortgage with the money set aside for this or do you want to use it towards your living expenses?
Q: My wife and I are considering purchasing a second home for weekend and holiday use, but not as an income property. How much of my primary residence should be paid off before buying the vacation property in retirement?
MS: Generally, whether someone should or shouldn’t purchase a second home depends on their situation. If you are planning to spend a large amount of time in the vacation location anyways, the cost of hotels and other travel expenses could add up to make purchasing the home an attractive option.
If you still have a balance on your primary residence, you should look at your overall budget and make sure you won’t be straining your finances too much with the additional purchase; remember, there is more to purchasing a home than just the mortgage.
You must also factor in utilities, cleaning, upkeep, HOA dues and any extra maintenance (such as lawn care or pool maintenance, if applicable). If your budget allows you to feel comfortable taking all these factors into account, then it could be a very good investment – and potential legacy for your heirs, as well – to purchase a vacation home.
Many factors go into a decision on what is the best option upon retirement. Luckily, there are several resources at your fingertips that can help make the best decision for your specific situation. I would suggest putting together a team of trusted advisors: first, your financial planner or tax professional and trusted mortgage advisor.
Between these experts, they should be able to help you review your situation and answer the questions you have.
Keep in mind, though, the ultimate decision will be yours. How comfortable are you with taking on more debt? Would you like to simplify your finances and pay off your home? Sometimes, peace of mind is worth its weight in gold.
Phil Shoemaker is the President of Originations, Homepoint, one of the nation’s largest wholesale mortgage lenders, with over 6,000 affiliated mortgage brokers across the country.