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Originally published Saturday, August 18, 2012 at 12:23 PM

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Scott Burns: Nearing retirement? Try a shorter term mortgage

Q: We just bought a new house. We need to decide between a 15-, 30- or possibly 20-year mortgage. My wife and I are both 51. We will likely work...

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Q: We just bought a new house. We need to decide between a 15-, 30- or possibly 20-year mortgage.

My wife and I are both 51. We will likely work only another 10 to 12 years at most.

At that point we will probably sell the house and move into something smaller (kids should be gone at that time). Any thoughts on how long a mortgage term we should select?

A: The answer depends on what you are doing in other areas of retirement preparation. At a minimum, you want to be certain that you are saving enough in qualified plans to capture your employer match (assuming there is one).

If the higher payments on a 15-year mortgage would interfere with that, then it would be better to take out a mortgage with a longer term.

It would be better still to save the maximum allowed in qualified plans, then take out the shortest mortgage you can handle easily.

The operative word here is "easily" — you don't want to put yourself into a monthly payment straitjacket, particularly with kids still at home.

Selling the house later will create a nice "liquidity event," allowing you to make a well-considered "right-sizing" decision on your retirement shelter, so maximizing mortgage pay-down is a really good idea.

Q: Here is my situation: I am turning 62 years old this year. My plan is to retire at age 65. I have three pensions plus a 401(k). I am single, have no dependents and am in very good health.

I have purchased my retirement home and have a mortgage of approximately $216,000 at 3.75 percent. I will soon be closing on the sale of my prior home and should have approximately $100,000 net proceeds after the cost of the sale.

My question is whether I should take the sale proceeds to apply on my mortgage amount, or should I purchase a $100,000 life annuity that hopefully will generate enough income in five to seven years to pay my monthly mortgage?

At 3.75 percent, I think I'm better off generating income rather than having a lower mortgage balance. I will still have to pay the same monthly amount, just for a shorter time. Maybe I am way off base and should go in a totally different direction. What should I do?

A: That's an interesting idea, but it's not nearly as lucrative as you seem to think. You can see why by comparing payments.

According to the website, a single male buying a $100,000 life annuity can expect a payout of 6.52 percent a year, or $543 a month. In comparison, the monthly payment on a $100,000 mortgage for 30 years at 3.75 percent is $463.

That would leave you with about $80 a month in extra spending money for the rest of your life. That's not bad.

But if you wanted to pay off the mortgage in seven years, you'd have to make payments of $1,355 a month, which is $812 a month more than the annuity income.


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