Your Mortgage and Home Equity should be part of your Financial Planning

Market Watch recently published “I really don’t want to work until I’m 67, I’m 57, make $100,000 a year, and have $300K in my 401(k). But I’m worried about my spending and have debt. Who can help?” The article provided some basic tips such as recommending this person use their income to pay off the debt (vs using their savings), change their spending habits and make sure they’re funding their retirement.

What the Market Watched missed entirely was using the mortgage and/or home-equity to help solve the debt and retirement issues this person is facing. Your mortgage and your home equity should be considered with your financial planning, especially with retirement on the horizon.

From the Market Watch article:

Question: I’m 57, single, have $300,000 in a 401(k) and about $12,000 in savings in different accounts. I owe $93,000 on a house and have $20,000 in credit card debt. I make about $100,000 per year. Should I consolidate my savings? Should I pay off my credit card with the savings and then rebuild my account? I am working on paying off the credit card but I have terrible spending habits. I really don’t want to work until I’m 67. What advice do you have? Should I hire a financial planner to help me? 

Here are my thoughts.

This person needs A LOT more in savings if they have 10 years (or less, if they don’t want to work until they’re 67) for retirement. In my opinion, they need to be dumping as much of their income into building more savings for retirement.

The good news is that they own a home with a low mortgage balance.

This could be a great opportunity to buy a home they plan to retire in. I recommend someone in this scenario consider the how long they plan on living in their current home. At their current age and earning an income, they could qualify to buy their next home that may be better suited for retirement and/or in a location where they want to retire. This will also allow them to take advantage of their home equity. They could pay off debts with the proceeds of their sale and use some of the proceeds to fund their savings. I would recommend, not using all of the proceeds to go towards the down payment of the new home.

If they are planning on keeping their home, they could consider accessing their home equity. Possible options to consider would be a home equity loan (HELOC), cash out refinance or using an All-In-One Loan to pay off the debt and have access to home equity.

I am a huge fan of the All In One Loan, which (very) basically is a 30-year home equity line of credit that is attached to a bank account. Deposits to the account are applied towards the principal balance and allows the mortgage to be paid off much faster than a traditional 30 year mortgage which has larger portion of the payment applied towards the interest (vs principal). Plus, the All In One Loan will allow this home owner to have access to their home equity well into retirement. It’s often referred to as “the last mortgage you will ever need”. The All In One Loan could be used to either buy their next home or refinance their current home and eliminate the debt.

At 57 years old, this person is too young for a reverse mortgage. And I would recommend the All In One Loan over a reverse mortgage IF they can qualify for this program.

Accessing home equity, whether it’s through the sale of the home or a new mortgage, will allow this person to restructure their debt and be in a better position for their retirement rather than using income (that should be invested for retirement) to go towards paying off high-interest rate debts.

It’s not unusual for people to think that they should pay off their home and be free of their mortgage debt. Although not having a mortgage payment sounds great, being able to retire and have access to funds (when needed) is what I would prefer. Even if this person opted for one of my suggestions, they could still focus on paying down their mortgage once they have their retirement funds established.

I encourage you to check out the All In One Calculator that I have on the right sidebar of this blog. If you have any questions or if you would like me to provide you with some scenarios for you, I am more than happy to help! We offer home equity loans, cash out refis, reverse mortgages, All In One Loans and many other mortgage programs for your financial needs.

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