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 three decades ago. According to the Harvard Joint Center for Housing Studies’ 2023 report, Housing America’s Older Adults, 41% of homeowners ages 65 to 79 carried mortgage debt in 2022, compared to just 24% in 1989.1 Among homeowners age 80 and older, more than 30% had a mortgage in 2022 — a dramatic increase from only 3% in 1989.1 These figures highlight a continued long-term shift, with significantly more retirees managing housing debt later in life than previous generations.
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?
The trend is especially pronounced among Baby Boomers, who are more likely than previous generations to carry mortgage debt into retirement. Rising home values, refinancing trends, and longer life expectancies have all contributed to this shift. As a result, mortgage debt is becoming a more common component of retirement planning rather than the exception.
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.
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¹ Source: Harvard Joint Center for Housing Studies, Housing America’s Older Adults 2023.
