Is Having A Retirement Mortgage A Good Or Bad Idea?
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Is Having A Retirement Mortgage A Good or Bad Idea? (2022 Update)

Updated May 27, 2021

Jason Munz CTFA, Vice President, Eau Claire

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.

an elderly couple in the kitchen talking about whether or not a retirement mortgage is a good or bad idea

Retirement Mortgage 101:

The Causes

The reasons for this change are several, according to the researchers. First, mortgage rates have fallen greatly over the last two decades. Many retirees who currently carry a mortgage were able to reduce their payments by refinancing older, higher interest mortgages into new loans with lower interest rates. Essentially, their mortgage burden is less onerous.

Additionally, the long-term run-up in home prices relative to earnings has meant that many homeowners find it hard to pay off their mortgages prior to retiring. Currently, home prices are more than four times the typical household’s earnings, compared to the late 1980s and early 1990s when prices were three times earnings.

Another factor is that, culturally, debt is not stigmatized as much as it once was. Total debt as a percentage of disposable income has been climbing for decades, encouraged, in part, by federal income tax law that allows an itemized deduction for home mortgage interest. However, with more taxpayers claiming the standard deduction instead of itemizing as the result of recent increases in the standard deductions for each filing status, this tax incentive may become less important.

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.

Keep 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.

Prepay 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.

A senior couple planning their investments with a financial advisor; retirement mortgage

Contact The Professionals At TrustPoint 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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Jason Munz CTFA, Vice President, Eau Claire