Is having a retirement mortgage a good or bad idea? If you’re planning for retirement, you should consider the pros and cons of having a mortgage before stepping out of the workforce.
A higher percentage of homeowners are retiring with a mortgage than was the case 30 years ago. A recent Harvard University study found that 46% of homeowners between ages 65 and 79 carried a mortgage in 2016, almost twice as many as the 24% of homeowners in this age group who carried a mortgage in 1990. The same study also found that 26% of homeowners age 80 and older carried a mortgage in 2016, compared to only 3% in 1990.
Mortgage Debt’s Impact on Retirement
The financial wellness of retirees can depend greatly on the percentage of their income they need to spend on housing. Typically, a mortgage payment (or rent) is one of the largest budget items for retirees. So, carrying a mortgage into retirement can be a significant burden. But there can also be good reasons for keeping a mortgage. Here are some factors to weigh if you are trying to decide on your best course of action.
How many retirees still have mortgages?
According to a recent report from the Joint Center for Housing Studies of Harvard University, over 40% of homeowners over 64 had a mortgage in retirement.1 Fannie Mae also found that Baby Boomers have demonstrated a greater likelihood of carrying mortgage debt into retirement than previous generations.
Keeping your mortgage into retirement
Some situations favor carrying your mortgage into retirement. For example, it may make sense if you carry a lot of consumer debt. Why? The general rule for paying down debt is to tackle the debt with the highest interest rate first. Since mortgage rates are usually lower than rates on consumer debt, you may be better off putting your available cash towards paying down credit card balances than trying to pay off your mortgage. Likewise, with any other consumer loans, you may have.
It can also make sense to carry a mortgage into retirement when:
- You can potentially earn more by investing your money than by using it to pay off your mortgage interest payments.
- Your cash reserves are limited and you do not have a way of replenishing them.
- You want to use your money to diversify your investments rather than tying it all up in real estate.
Prepaying your mortgage
It may be financially wiser to prepay your mortgage before retirement if your retirement income will be limited and won’t accommodate a mortgage payment. It can make sense also if there is no prepayment penalty and you estimate that you can save a large amount of interest in the long run by paying off your mortgage early. And finally, you should consider prepaying your mortgage before retiring if you just don’t like debt and don’t want to have to worry about it. However, paying off a mortgage when it would leave little to no savings for an emergency can pose a risk.
Another option would be to downsize for retirement. If you strategize, you could potentially buy a smaller home and leave yourself mortgage free from the profit of selling your current home. But, you must consider tax implications, closing costs, an accurate value of your current home, and have a good understanding of the cost of a home you are thinking of downsizing to.
Contact The Professionals At Trust Point For Help!
Deciding whether or not to carry your mortgage into retirement can be a difficult decision. For more information or to discuss your specific situation, contact one of our financial professionals at Trust Point.
Source:
https://www.nytimes.com/2024/02/17/business/retirement-mortgage-investing.html
FAQs
Key Takeaways. Carrying a mortgage into retirement allows individuals to tap into an additional stream of income by reinvesting the equity from a home. The other benefit is that mortgage interest is tax-deductible. On the downside, investment returns can be variable while mortgage payment requirements are fixed.
Is it wise to have a mortgage in retirement? ›
But the downsides can be significant, some experts say. Conventional wisdom dictates that retiring with debt — especially a debt as large and significant as a mortgage — is financially dicey at best and potentially ruinous at worst.
At what age should your mortgage be paid off? ›
To O'Leary, debt is the enemy of any financial plan — even the so-called “good debt” of a mortgage. According to him, your best chance for long-term financial success lies in getting out from under your mortgage by age 45.
Is it a good idea to pay off a mortgage with a 401k? ›
In general, it makes the most sense to pay off your mortgage with your 401(k) when the interest you owe on your mortgage exceeds the earnings you expect to make on your investments.
Is owning a home a good retirement plan? ›
Key Takeaways
Housing costs will be a big part of your retirement budget whether you rent or own. Owning offers stability and equity, among other perks. Fluctuations in market value, unexpected maintenance expenses, and insurance deductibles can increase ownership costs.
Can an 80 year old get a 30 year mortgage? ›
The Equal Credit Opportunity Act prohibits lenders from blocking or discouraging anyone from a mortgage based on age.
Why does Dave Ramsey say pay off a mortgage? ›
He goes on to say: “Paying off your mortgage early seems impossible but it is completely doable and people do it all the time, but how can you do it and why would you want to put in the extra effort? Paying off your mortgage early will rev up your wealth building.”
How many people retire with a mortgage? ›
A higher percentage of homeowners are retiring with a mortgage than was the case 30 years ago. A recent Harvard University study found that 46% of homeowners between ages 65 and 79 carried a mortgage in 2016, almost twice as many as the 24% of homeowners in this age group who carried a mortgage in 1990.
Should an elderly person pay off their mortgage? ›
There may be good reasons to pay off your mortgage. It can save you thousands of dollars in interest, depending on the current size of your debt, and give you peace of mind that no matter what happens in the future, you own your home outright.
What is the best age to be mortgage free? ›
A good goal is to be debt-free by retirement age, either 65 or earlier if you want. If you have other goals, such as taking a sabbatical or starting a business, you should make sure that your debt isn't going to hold you back.
The IRS allows penalty-free withdrawals from retirement accounts after age 59½ and requires withdrawals after age 72. (These are called required minimum distributions, or RMDs). There are some exceptions to these rules for 401(k) plans and other qualified plans.
How can I avoid paying taxes on my 401k withdrawal? ›
Deferring Social Security payments, rolling over old 401(k)s, setting up IRAs to avoid the mandatory 20% federal income tax, and keeping your capital gains taxes low are among the best strategies for reducing taxes on your 401(k) withdrawal.
Are there any disadvantages to paying off your mortgage? ›
The Downside of Mortgage Prepayment
Prepaying your mortgage ties up your funds in your home, potentially leaving you with less liquidity for other financial needs or opportunities.
Is it smart to have a mortgage in retirement? ›
Carrying a mortgage during retirement can be troublesome if investment returns are variable, leading to problems paying a mortgage or uneasiness related to carrying a large amount of debt during a market downturn.
What age is best for retirement home? ›
Although the average age in a retirement community is 84 years old, moving into a community greatly depends on the individual. Some people choose to move into a retirement community at a younger age, but a large majority make the transition between the ages of 75 and 84.
Do most retirees own their home? ›
By the numbers: About 80% of Americans over the age of 60 are homeowners, per a new Vanguard report entitled "Home is where retirement funding is."
What percentage of retirees still have a mortgage? ›
According to a recent report from the Joint Center for Housing Studies of Harvard University, over 40% of homeowners over 64 had a mortgage in retirement.
Is it more important to pay off mortgage or save for retirement? ›
Should You Pay Off the Mortgage Before or After Investing for Retirement? Investing for retirement comes first—it's the priority.
Should I stop saving for retirement to buy a house? ›
If you feel strongly about homeownership or you think of rent payments as wasted money, it might make sense to forgo some future retirement savings to buy a home now. On the flip side, if your budget is such that you're considering a loan from your retirement plan, it might be time for a reality check.
Is it better to pay cash for a house in retirement? ›
Buying in cash is not a no-brainer, although you may feel it's the safest course of action to keep your home safe, especially if you don't have other debt. However, if you're downsizing into a 55+ community, buying cash can be the best course of action and help reduce your monthly expenses.
