1) Phil's Financial Tip of the Day:
The best way to retire without a mortgage is to pay it off in full...before you retire.
6 Ways to Retire Without a Mortgage-From Kiplinger
Admit it: Whether you're 35 or 65, the prospect of retiring without a mortgage is an attractive one. No more monthly checks to your lender means extra money to spend on having fun once you exit the workforce. After years of punctual principal-and-interest payments, it's the least you deserve, right?
There are several smart ways to retire without a mortgage. We've come up with six that fit a variety of retirement scenarios. Some approaches benefit from an early start -- so if you are able, try to plan ahead. Other mortgage-free-retirement options can be put into effect even if you're close to collecting Social Security.
Some retirees don't mind a mortgage, be it for the tax write-off or to prevent too much money being tied up in home equity. But if your goal is the peace of mind that comes with paying off your loan before you reach retirement, check out these six ways to retire without a mortgage.
Make Extra Mortgage Payments
Over time, a few bucks here and there tacked on to your mortgage payment can translate into thousands of dollars saved on interest and years shaved off the repayment period. The trick is to find small ways to cut corners on other household expenses so that you can apply those modest savings toward your mortgage. Simply swapping out traditional incandescent light bulbs for CFLs, for example, can save you $50 a year in energy costs. A programmable thermostat can save you up to $180 annually.
A little extra goes a long way. A $200,000 mortgage at 6% over 30 years works out to a monthly payment of about $1,200 (excluding taxes and insurance). You'll pay just over $231,000 in interest alone. But put an extra $100 a month toward the same mortgage and you'll save nearly $50,000 in interest and retire the loan five and a half years early.
Refinance Your Mortgage
A surefire way to trim the bill for your home loan is to refinance your mortgage to a lower rate for an equal or greater period of time. You'll enjoy reduced payments and less strain on your bank account. Not a bad idea if money is tight. What you won't enjoy is a mortgage-free retirement.
[Also see: Urban Mansions Rich With History]
To pay off your mortgage early via refinancing, you'll need to switch to a shorter-term loan. In 2011, a popular refi option for homeowners who weren't underwater was going from a 30-year mortgage to a 15-year loan. Let's say you have 25 years left on a 30-year mortgage at 6% and still owe $175,000. You'd pay about $163,000 in interest over the remaining quarter century. For just $167 more per month, plus one-time closing costs, you could refinance to a 15-year mortgage at 4% and save $105,000 in interest. And, of course, you'd be mortgage-free a decade earlier.
Downsize Your Home
Think about it: At a time when you're supposed to be enjoying the simple life, do you really need a formal living room, separate dining room and two spare bedrooms that you never set foot in? If your answer is no, think about downsizing your home.
The beauty of downsizing to a smaller home in the same area is that you don't need to say goodbye to your friends, family and community. Of course, beauty can also be found in the fact that you might be able to pay cash for your new abode. That means no mortgage.
And don't limit your notion of downsizing. Just because you spent the past 30 years in a traditional ranch doesn't mean you need to purchase another ranch with less square footage. Check out conventional alternatives (condos, townhouses) as well as unconventional options (houseboats, RVs and even tiny homes).
Relocate to a Cheaper City
Can't find the right place at the right price to retire in your hometown? Move somewhere cheaper. Sure, there will be sacrifices, but what you'll give up in familiarity you'll make up for financially. The best places to retire combine ample activities with affordable real estate. And moving to an affordable locale will boost the odds that you won't have to take out a new mortgage.
Home prices aren't the only factor. Consider property taxes and homeowners insurance premiums as well. Both affect the overall affordability of a home. In New Jersey, for example, property taxes and insurance premiums combined average $7,270. You'd pay just $1,444 in, say, Kentucky, one of the ten most tax-friendly states for retirees. Some state and local governments reduce or even waive property taxes for residents 65 and older.
Feeling adventurous? You might be able to pay even less for a home and enjoy lower living expenses if you retire overseas. Look into bargain-priced and retiree-welcoming countries such as Belize, Mexico, Panama and Vietnam.
Get a Roommate
Don't discount the financial advantages of taking on a roommate. By letting out a spare bedroom and applying the rent you collect to your mortgage, you can knock years off the time it'll take to repay the loan. An extra $250 a month toward a $150,000, 30-year mortgage at 6% will erase the debt more than 13 years early. An extra $100 a month retires the mortgage seven years early.
The benefits to your bottom line extend beyond the mortgage. Rental income can help defray the cost of utilities -- gas, electricity, phone, cable, Internet -- and maintenance. Annual upkeep on a typical three-bedroom, two-bath detached home runs $7,910, on average, according to Homewyse.com, a homeownership Web site. As a bonus, a roommate can help with chores, providing a welcome respite for any homeowner weary of doing dishes and dusting bookshelves alone.
Rent Instead of Owning
A guaranteed way to retire without a mortgage is to sell your current home, pay off the loan in full, pocket the profits, and use the proceeds to rent a place to live instead. Although it might seem as if you'd just be writing a check to a landlord instead of a lender, the differences between renting and owning are considerable.
Among the advantages of renting in retirement: no lawn to mow; no leaky roof to replace; no property taxes to pay; no assets tied up in illiquid real estate; and no residential albatross around your neck preventing you from moving around as you wish. You can even save on little things, such as insurance. The average annual premium for renters insurance is $176, compared with $791 for homeowners insurance. As for losing the ability to deduct the interest you pay on your mortgage -- a popular argument in favor of homeownership -- keep in mind that the amount of interest due declines over time, so later in the life of a mortgage there is less and less interest to write off.
The single biggest risk of renting in retirement instead of owning is that you might run out of money to pay the rent. If you own a home, by contrast, you could probably resort to a reverse mortgage when savings dry up. This is a legitimate concern, and one that you should address with your financial adviser. A well-structured portfolio can provide a reliable income stream deep into retirement. A part-time job can also stretch your nest egg.
2) In the Markets today:
The "buy American stocks" trade is gaining backers by the day as US economic indicators continue to show improvement and investors become less focused on Europe
Wall Street at 5-month high-From Reuters
Stocks climbed to a five-month high on Tuesday, led by materials stocks after an upbeat forecast by aluminum company Alcoa and strong gains in bank shares.
Alcoa Inc (NYSE:AA - News) posted revenue that topped expectations late Monday and gave a bullish outlook for the aluminum industry. The stock gave up early gains to end at $9.44, up 1 cent.
However, data showing strong Chinese imports of copper helped buoy the rest of the sector.
A gauge of materials companies' shares (:.GSPM) was among the leaders of S&P 500 sectors, with a gain of 1.8 percent.
The U.S. equity market continued its recent divergence from the woes of the euro zone. Recent economic reports and optimism about the U.S. earnings season have pushed stocks higher in the start of the new year, with the benchmark S&P 500 rising in five of six sessions.
"Investors are still focusing on Europe but not putting as much weight on Europe as they were in November," said Jonathan Corpina, head of NYSE floor operations for Meridian Equity Partners in New York.
That focus could change quickly. Key bond auctions later this week from Italy and Spain, two countries at the center of the euro zone crisis, could hurt sentiment if they go poorly.
"Historically, earnings season has helped the market shift higher - so let's hang our hats on this for now, but let's not forget about what is going on in Europe," Corpina said.
Industrial and materials stocks, closely tied to economic performance, were the day's biggest gainers. Caterpillar Inc (NYSE:CAT - News) shares were up 3 percent at $99.96, leading the Dow index higher.
U.S. bank stocks continued a rebound that has lifted the KBW banks index (Philadelphia:^BKX - News) nearly 9 percent so far this year. The KBW rose 1.9 percent on Tuesday.
JPMorgan Chase (NYSE:JPM - News) rose 2.1 percent to $36.05.
Easing some concerns about Europe, Fitch said it does not expect to cut France's AAA credit rating this year, but countries under review such as Italy or Spain could be downgraded by one or two notches.
The Dow Jones industrial average (DJI:^DJI - News) gained 69.78 points, or 0.56 percent, to 12,462.47. The Standard & Poor's 500 Index (SNP:^GSPC - News) rose 11.38 points, or 0.89 percent, to 1,292.08. The Nasdaq Composite Index (Nasdaq:^IXIC - News) climbed 25.94 points, or 0.97 percent, to 2,702.50.
The Dow and S&P 500 hit their highest intraday levels in five months. The S&P 500 close above 1,285.09 is the highest since the end of July and marked a breach of technical resistance, which could spur further gains.
Copper prices rose 3.1 percent, the best performance since late November, after China reported copper imports rose to a record high last month.
The CBOE Volatility Index VIX (Chicago Options:^VIX - News), Wall Street's so-called fear gauge, fell 2.9 percent to 20.46, making another test of the psychologically key 20 level, according to WhatsTrading.com options strategist Frederic Ruffy.
The VIX is down 11.6 percent so far in 2012 and falling to levels last seen in late July as the S&P 500 has seen average daily price moves of fewer than 8 points so far this year, he said.
Volume was solid, with about 7.02 billion shares traded on the New York Stock Exchange, NYSE Amex and Nasdaq, above the daily average of 6.7 billion.
Advancing stocks outnumbered declining ones on the NYSE by 2,305 to 687, while on the Nasdaq, advancers beat decliners 1,833 to 699.
3) Top financial story of the day:
Italy poses the greatest risk to the euro, Fitch said, citing the country's debt burden and high borrowing costs.
Italy Is Biggest Risk to Euro, Says Fitch-From The Wall Street Journal
Fitch Ratings on Tuesday pointed to Italy as the euro-zone member that poses the greatest threat to the currency bloc's future, as the lack of a regionwide plan to prevent the sovereign-debt crisis from spreading has coupled with the country's large debt burden and high borrowing costs.
Those factors are a major reason Italy's credit rating is likely to be downgraded by the end of January, said David Riley, head of global sovereign ratings at Fitch, speaking at a conference in London. "Italy is the front line of this crisis," Mr. Riley said, adding that the country's elevated government-bond yields have "marked a profound intensification of the crisis."
Italy is planning to sell €440 billion ($561.67 billion) in government bonds and Treasury bills in 2012.
This is a daunting task given its current borrowing costs, Mr. Riley said.
In a blow to Italy's new technocrat government, a cabinet undersecretary resigned Tuesday amid claims in Italian media reports that he accepted a complimentary vacation for his family at a Tuscan resort.
Carlo Malinconico, an undersecretary in charge of the publishing sector, has denied the accusations.
He resigned "to defend himself... and to save the credibility and efficacy of the government's actions," Mr. Monti's office said.
Mr. Monti took the helm in late November after Silvio Berlusconi resigned. The Monti cabinet, given the task of Italy through the debt crisis, doesn't represent Italy's main political parties.
Italy's 10-year government bond was yielding 7.13% on Tuesday, a spread over the German bund of about 5.25 percentage points, according to data provider Tradeweb.
Even an Italian government-bond yield of four percentage points over the German bund, coupled with zero real gross domestic product growth, could prove "explosive" for the country, Mr. Riley said, though a spread of 1.5 percentage points and growth of 1.5% would leave Italy solvent.
However, the current market levels aren't just a potential danger for Italy, but for the euro-zone as a whole, Mr. Riley said. The lack of agreement by European leaders on how to implement a "credible firewall" to prevent contagion puts the region at risk. The financial firewalls currently in place—the temporary European Financial Stability Facility, the longer-term European Stability Mechanism, and support from the International Monetary Fund—are insufficient, he added, and leave Europe at risk of rolling into a self-fulfilling liquidity and solvency crisis.
This is "one of the reasons why we have Italy on watch negative, it's one of the reasons why when we conclude that review, there is a significant chance [Italy's] rating will fall," Mr. Riley said.
German and French leaders met Monday to discuss details of a pact on closer fiscal and economic policy, although reaction in the markets was muted as key questions appeared unanswered.
Fitch is set to conclude its review of six euro-zone countries that are on negative watch by the end of January, the ratings company said. France, which has a negative outlook, won't face a downgrade in 2012, it said.
Fitch rates Italy at A-plus and France at triple-A.
Mr. Riley also noted that a Greek exit from the euro remains a "potential option." Greece still could drag the euro zone into a deeper financial crisis, he said, adding that a private-sector contribution of 60% on Greek government bonds wouldn't lead to a sharp reduction in the country's debt burden. Fitch rates Greece at triple-C.
In other euro-zone government-bond markets, Austria, which has the highest yields among the currency bloc's triple-A-rated issuers, paid higher funding costs to sell four-year bonds at auction than at the previous auction in November. This reflected investors' unease over the country's exposure to Hungary, which started informal talks with the International Monetary Fund Monday over a loan package. Yields on Austria's 10-year bond, however, remained below levels of the previous auction conducted in July.
Austria's Federal Financing Agency sold €1.2 billion of the 4% September 2016 and 3.65% April 2022 bonds, and allocated a further €120 million to the state. Demand for both implied twofold coverage of the amount sold, slightly below previous levels.
Also Tuesday, the Netherlands sold €3.105 billion, closer to the upper end of the €2.5 billion-€3.5 billion target range, of a new three-year government bond at an average yield of 0.853%.
4) Quote of the Day from Dave Ramsey.com:
Ninety-nine percent of failures come from people who have the habit of making excuses. — George W. Carver
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