First Person: Why a 15-Year Mortgage Is Part of Our Retirement Plan

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Just like other 50-somethings, socking money into savings plans is part of our retirement strategy. But saving money isn't all. Along with investing in funds that will provide us with a regular income during our retirement years, we're also concentrating on lowering our debt. The less debt we have at retirement, the less money we'll need to pay the bills.

With the low mortgage interest rates we've been seeing lately, we decided now would be a good down to refinance one of our rentals. The original mortgage was currently at 7.5% with 28 years left to go. Refinancing the loan at 4% would drop our payments by nearly $260 a month. But is another 30 year mortgage the way to go with retirement on the horizon? Of course not. What we decided to do instead is to switch the term to a 15 year mortgage. The payments would stay about the same.

As nice as it would be to boost our monthly income by $260, turning that extra cash back into our rental property would save us over $100,000 in interest. And by paying down the mortgage early, this particular property will no longer be encumbered by a mortgage by the time we hit retirement age. This really opens up all sorts of great possibilities for us.

Source of passive income.

We could choose to keep the rental as a source of passive income. Right now, it is "breaking even". In 15 years when the mortgage is finally paid off, the rental income on this property should be $1800 a month or more which would be a nice supplement to our pension fund. If at age 75 or 80 the property becomes too much to manage, we can turn the management over to property management agency and still pocket a nice chunk of cash each month.

Tax deferred exchange.

Once the property is paid off, another option available to us would be to trade the rental property for a vacation home elsewhere. As long as we are trading for a property higher in value that the rental home, the trade could qualify for a tax deferred exchange. This would defer any federal income tax due on the transaction until it was sold for cash.

Sell it for cash.

If in our 80s we were faced with a medical emergency or an unexpected need for cash, the property could be sold outright. While this is perhaps the least desirable of our options, having an investment property that could be sold for cash will allow us to fund an emergency without having to put up our primary residence as collateral.

My husband and I are no longer counting on Social Security to be there for us once we retire. Paying off a mortgage in 15 years is a sensible way to lower our debt and boost our income for when we'll need it most.

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