How Debt Can Ruin Your Retirement

by Guest Contributor

This is a guest post by Mike Egan who is the author of Your Stronger Financial Future.

Your Stronger Financial Future by Mike EganA recent article in the New York Times focuses on seniors who are considering mortgages on new homes when they retire. The article is a good summary of what seniors (or anyone considering a mortgage application) should expect and the specific items to have handy, such as proof of income and a good credit score.

What the article doesn’t address is the question of whether a mortgage is a good idea, either for a senior (65 and older) or anyone else.  Think about this – no matter what the term of the home loan, or mortgage, you’ll be paying interest to the lender, plus repaying the principal (the $$ you borrowed) for some period of time.  Home mortgages and student loans are the two main examples of what I call “good debt” – which are loans that result in you owning something of value at the end.  So, given that a mortgage generally results in you owning the house or condo when you’ve paid back the loan, let’s examine the math involved in a home mortgage.

For a standard 30-year mortgage, you’ll make 360 payments (30 years x 12 months) of both principal and interest.  In the beginning the vast majority (77.61%) of the payment you make to the bank is interest; only a tiny amount is a repayment of the $$ you borrowed. Gradually as you pay down the principal balance, the monthly payment gets more balanced, reaching approximately 50% interest and 50% principal in year 17. When you are very close to the end of the mortgage term, your payment will be almost completely principle, since you won’t owe that much more back and so the interest charges, based on that lower principal balance, are very low.    Another item to consider is that a $250,000 mortgage will actually cost $483,139.46 over the entire term*, which consists of $233,139.46 in interest, plus the original $250,000 you borrowed.

Ultimate Checklist for Your Finances

Take back control of your finances!

Get a FREE checklist for the money moves to make in the New Year.

Also get new articles, advice, and tips delivered right in your email inbox with our newsletter!

What if instead you selected a 5 year or 7 year mortgage? The idea is the same – you buy the house with some percentage of your own money and the remainder from the lender. You make monthly payments of principal and interest and eventually own the home after you’ve made all of the payments. But in the case of a 5 year home loan, payments automatically go to over 50% of your principal in year 1 (77.92% is paid towards principal). At that point you’re on the way to paying less and less interest and more and more principal, racing towards full home ownership.  That same $250,000 mortgage that costs $483,139.46 in total for 30 years only costs $283,068.50 for 5 years*, a savings in interest costs of $200,070.96!

Good debt includes mortgages, but your choice of how long to borrow can have a very large effect on your retirement savings!

What would it look like for you to explore the idea of a 5 or 7 year home mortgage?

Mike Egan, a 20-year Wall Street veteran, is on a mission to help Americans unleash the power within them to build a stronger financial future. He is the author of “Your Stronger Financial Future” and a blogger at MacroMike.com.

Open a Lending Club IRA and boost your retirement

About Guest Contributor

This article was written by a guest author. For more information about this author, please see the bio information listed in the article. If you would like to write an article for Money Q&A, please visit our Guest Posting Guidelines page.


Guest Contributor has written 222 articles on Money Q&A. Learn more about Money Q&A on Twitter @MoneyQandA and @HankColeman.


Subscribe To Money Q&A

If you want to learn more about taking back control of your money please subscribe to Money Q&A’s RSS feed or via email to receive all the latest articles! You can also subscribe to our Free Weekly Newsletter.

{ 2 comments… read them below or add one }

cashflowmantra

Personally, I don’t think having any debt during retirement is a good idea. That is my first requirement before retiring–making sure all of my debt is paid off. Then I will focus on making sure I have enough saved and enough income.

Reply

Doctor Stock

Debt during retirement is not worth it to me… I suppose the exception would be if a person only has their property as their main retirement asset.

Reply

Leave a Comment


Previous post:

Next post: