Retirement Planning

Used properly, an interest-only mortgage can be an excellent tool for retirement planning, especially if you plan to sell your current home within the next ten to 15 years anyway. An interest-only mortgage, as the name implies, is a mortgage in which your monthly mortgage payments only cover the interest on the loan and there is no pay-down of the principal of the loan.

Depending on the amount of the mortgage, not making a payment on the principal can save you between $100 and $250 per month – even more on mortgages of more than $250,000.

If your home is paid off or nearly paid off and it has appreciated in value, one way to use your built-up equity might be by refinancing to a fixed-rate 30-year mortgage with a 15-year interest-only option and taking out the equity that has built up in your home.

By investing that equity into your IRA or into another investment vehicle, and by studiously investing the $100 to $250 that you are saving each month by not making principal payments on your new loan, it is possible that the income generated by your investments will be sufficient to see you through your retirement years.

At the same time you will still be able to take the mortgage interest deduction on your income tax, which will help elongate your investment dollars.

Even without the equity created by paying down your principal balance each month, after ten or 15 years, inflation will likely have created another nice pile of equity in your house which you can access by selling your house, just as you always planned.

With the new equity, plus the equity which you invested 15 years early, plus the monthly contributions that you have been making to your retirement account out of the savings on your mortgage by not paying on the principal of your loan, you could have enough income to make your golden years truly golden.