In one's senior years, is it wise to pay a home off even if you can afford the house payment?

Question

My dear friend/neighbor keeps asking me this question and I'm afraid I'll give the wrong answer. I know he is in his early Sixties, owes only $58K on his home, can easily afford the payment...but he thinks he should take $58K out of his 401 and pay it off. His logic is that he will inevitably get unhealthier in his Sixties decade, so he would feel more secure owning his home. I'm thinking he will take a huge hit on his income and Uncle Sam will tax the heck out of him if he takes out $58K in one lump sum. Anyone out there have good financial wisdom I can pass along so he doesn't make a mistake? I told him to seek a financial adivsor but he won't. Thanks everyone.

Answer 1

I see some interesting responses on here. I disagree with the reverse mortgage suggestion. Up front it sounds great to take out a mortgage and never have to worry about paying it. Needless to say interest continues to accrue and as this person suggested it will be paid from the estate. Many times however it requires the estate to sell the home to do so. I would only suggest a reverse mortgage as a last resort.

This situation is a sensitive one as many factors come into play. Such as what is the value of his 401K, what other sources of income does he have and what other savings vehicles are available to him. Since he is in his 60's he can withdraw from his 401K without a penalty although he is still subject to taxation on the lump sum distribution. This is why it is important to know what other sources of income he does have and are those other sources taxable.

If he his paying a high mortgage rate there is some benefit to paying off his mortgage, but not if this severely depletes his liquid assets. It is a complicated question and needs a full financial analysis to see if it is beneficial.

I would however avoid that reverse mortgage option in this situation.

Answer 2

I don't know all of the particulars of this person's situation...however, my immediate reaction to this question...based upon the facts you present is as follows. He should probably NOT pay off his house at present. Pulling the money from the 401K will be taxed at his marginal tax rate...and also at his state marginal tax rate (unless he is in one of the few states who have no state income taxes). Since he is over 59 /12 he likely can avoid the penalty for early withdrawals (assuming his 401k rules are similar to IRA rules)...but he will owe the income taxes. I understand his fear of losing the house...and his concerns about future health problems. However, currently his funds are probably earning a decent return...and his interest payments on his home are likely tax deductible so that he is probably making the best use of his 58K at the moment by continuing to make the house payments and leaving the funds in the 401K.

Answer 3

It depends on his other income, since that affects what tax he would pay on the 401K withdrawal. Also depends on what his mortgage rate is - if it's really high, it might even make sense to pay it off. Even if he does get less healthy later (and most people make it through their 60's without falling apart) he can always take the money out later, and it would have that much longer to appreciate tax-free.

What's the hurry to pay it off? If it's really eating at him to have a mortgage, then maybe it's worth it to go ahead and pay it off even though financially it probably doesn't make much sense unless he has a very high mortgage rate.

Since you say he can easily afford the payments, an alternative might be to pay maybe a couple hundred dollars extra each month, and get the mortgage paid off sooner.

Answer 4

Do you've charge playing cards, a automobile mortgage, or different interest debt which could be larger than a house mortgage? Pay that off first, extra bang for your dollar. if you're figuring out to purchase a house as funding sources, that interest is deductible adverse to benefit, it really is also solid. this doesn't recommend that you mustn't pay off the mortgage, besides the undeniable fact that it may help you with your priorities for the money you've saved. My attitude might want to be to placed 20% down, and having the residence income cover the funds. Then I save a nest egg aside to cover upkeep or legal expenditures (what in case you get sued?) Banks do not pay a lot interest, yet you may favor to think about putting some low-priced prices right into a inventory or bond index with the intention to diversify, and create more effective positive aspects. save some in a funds marketplace or low-priced prices account in case you want it. if you're volatile and unafraid of going bankrupt, you may also purchase a second $60,000 residing house with the further funds and employ it. That way, you're figuring out to purchase 2 residences fairly of purely one. that is extrememly volatile, and that i does not propose this in case you do not have the common income to pay both mortgages without renters. yet you may continually roll the dice...

Answer 5

At 62 years of age your neighbour qualifies for a "Reverse Mortgage". This mortgage, appraises the house, so lets say his house is worth $250.K - he owes $56.K - the Reverse Mortgage will give him up to 70% of the market value. Now he doesn't have to repay this Reverse Mortgage, and its Tax Free - as long as he lives in his house. When he dies - "who cares" - LOL - no what I mean is that when he dies, the amount of money that was given to him on the Reverse Mortgage is then paid out of the Estate.Please tell your neighbour to do that, and leave his 40lK alone, he'll loss a fortune if he breaks into it now! Also PLEASE tell him he is still very young in today's world, us 60'ers are living 'till our 80 and 90's and very healthy may I add!! Your a very nice neighbour and friend, I wished you lived beside me. God Bless you for your compassion. Now tell your friend and make sure you tell him that I am an excellent Financial Adviser!

Answer 6

Pay it off only if the interest rate on the home is more than the amount you earn by keeping the money invested.

Having your money working for just 4% a year isn't smart when your home payment is 10%.

Answer 7

a financial advisor is the best advice, but to do it on your own would requir a lose on the 401 not to mention the penalty for earley withdraw, and taxes. I suggest the financial advisor strongly and one that has experiance doing realestate