What to Do if You Can't Pay Off Your Mortgage Before Retirement

Here's what to do if you're bringing mortgage debt into retirement.

Many people have the goal of kicking off retirement without any debt -- and that includes a mortgage. Now, if you buy a home in your 20s or 30s, there's a good chance you'll have it paid off by the time retirement rolls around. But what if you buy a home later in life? If you don't purchase a place of your own until you're, say, 45, and you take out a 30-year mortgage, you may still have a decade of home loan payments by the time your career comes to an end.

If you're approaching retirement with a mortgage hanging over your head, know that you're certainly not alone. Here's what to do if you're in that situation.

1. Don't panic

Having mortgage debt in retirement may not be ideal. But there's no need to panic over it. Of the various types of debt you could have, a mortgage is probably the healthiest kind. Not only can mortgage debt help you own your home outright eventually, but you may also be able to deduct the interest you pay on your mortgage on your tax returns for some nice savings.

2. Get on a tight budget

If you're worried about affording your mortgage payments during retirement, one of the smartest things you can do is set up a budget that prioritizes your essential expenses, like housing, healthcare, food, and transportation. As a retiree, it's natural to want to have money left over to fill your days with fun activities. But if you still have a mortgage to grapple with, you'll need to make sure you can cover it fully before spending on other things.

3. See if refinancing makes sense

If you're entering retirement with several years left on your mortgage, then refinancing could make it less expensive to pay off. When you refinance, you swap your existing mortgage for a new one with terms that work better for you. So if you have a mortgage with a 6% interest rate, refinancing to a 3.5% rate will result in lower monthly payments.

Now one thing you probably don't want to do as a retiree is set back your mortgage payoff clock. If you have 10 years left on your mortgage, getting a new 30-year loan isn't optimal. But many refinance lenders offer custom loan terms, and many also offer 10-year mortgages, so it's worth exploring your options.

That said, you'll also want to make sure you have enough years of mortgage payments left for refinancing to be worthwhile financially. That's because lenders charge closing costs to refinance a loan, and you'll need to reap enough savings to come out ahead after paying them.

This means that if you're charged $4,000 in closing costs to lower your monthly payments by $200, it will take you 20 months to break even. If you only have two years left on your mortgage, you probably don't want to refinance. But if you have seven years left, it could be a smart move.

Not everyone who owns a home in retirement starts out mortgage free. Having to make home loan payments once you retire may not be ideal, but there are things you can do to make it a little easier.