People have the most options to deal with debt if they create a plan before they retire, financial planners say. Here are three loans to consider before you stop working:
Owing money in retirement isn’t ideal — but most people do.
Seventy percent of U.S. households headed by people ages 65 to 74 had at least some debt in 2016, according to the Federal Reserve’s latest Survey of Consumer Finances. So did half of those 75 and older.
People have the most options to deal with debt if they create a plan before they retire, financial planners say.
Here are three loans to consider before you stop working:
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Refinance (or recast) your mortgage
Certified financial planner Rebecca L. Kennedy of Denver would prefer that clients pay off their mortgages before they retire. But paying off a mortgage may not be feasible or advisable, especially if it would mean taking a lot of money from a 401(k), IRA or other account.
“Often the majority of the assets are pretax, so it would require a much larger withdrawal to net the after-tax amount needed,” Kennedy says.
People also could consider downsizing to eliminate or reduce mortgage debt, Farinola says.
For retirees determined to stay put, refinancing or “recasting” the loan can lower payments, says Serina Shyu, a certified financial planner in Atlanta. While refinancing requires taking out a new loan, with substantial fees, recasting means keeping the same loan, but using a lump sum to pay down the balance and lower the payments. Recasting is offered by some but not all lenders and may not be good idea if the lump sum would come from retirement accounts.
Another option, if the mortgage balance is less than half of the home’s market value, is using a reverse mortgage to pay it off. Reverse mortgages allow people 62 and older to tap their home equity without having to pay the money back until they move out, sell the house or die.
Consolidate your debt
People with good credit scores, and sufficient discipline, can use zero-percent balance transfer offers to consolidate and pay off their credit-card debt.
Those who need more time to pay off debt might consider a personal loan with a fixed interest rate and fixed payments. If it would take over five years to pay off the debt, however, their debt load may be unmanageable. In that case, they should talk to a credit counselor and a bankruptcy attorney to better understand their options.
Open a home equity line of credit
A home equity line of credit (HELOC) is like a credit card that allows you to borrow against the value of your home. If that sounds dangerous — good. It should.
HELOCs shouldn’t be used for frivolous spending, but they can be a good backup to an emergency fund. HELOCs also can fund home repairs or long-term care.
A HELOC probably isn’t a good option for people who aren’t disciplined about spending. HELOCs have another pitfall: Payments on any borrowed money can spike after an initial interest-only “draw period” ends, usually after 10 years.
Another product, a reverse mortgage HELOC, costs more to set up, but payments are optional. Some financial planners recommend reverse mortgage HELOCs as a potential source of cash in market downturns. The retiree can draw on the HELOC rather than selling stocks in a bad market, and pay the money back — or not — in good markets.
“The key advantage is ability to choose if and when to make payments, and ability to access a growing line of credit,” says Tom C.B. Davison, a certified financial planner in Columbus, Ohio.