Although it may seem counterintuitive, keeping a mortgage payment during retirement can potentially provide you with more freedom and flexibility in the long run.”. Retirement mortgages explained Getting a loan, even when you aren’t retired depends on your income, credit history, amount of debt, and your assets. Making that last payment was something to celebrate, and that achievement was shared with family and friends. “With a reverse mortgage, your debt increases over time due to the interest on the loan,” said Jim Adkins, founder and CEO of Strategic Financial Associates, a financial planning, investment advisory, and wealth management firm in Bethesda, Maryland. Foreclosure can be a serious problem if it happens to you. Here are some ways to reassert financial goals as well as suggestions for preparing for what may be next. Without a mortgage, Big Mama lived comfortably in retirement for more than two decades on Social Security and a small pension. Any of these loans will let you make use of your home equity instead of just living in it. You could earn a lot more by investing in stocks, especially within a tax-advantaged retirement account such as a 401(k) or IRA. If you’re debating between paying off your mortgage, doing a cash-out refinance, or retiring with your existing mortgage, here are a few things to keep in mind: Paying Off Your Mortgage … There are two potential problems with carrying a mortgage during retirement: less accumulated net wealth and the possibility of foreclosure if a retiree can’t make his or her mortgage payments. But if your income from Social Security and a pension (if you have one), and to some extent your assets (the nest egg you plan to draw on for additional retirement income), will be sufficient to make your monthly mortgage payment and meet your other expenses in retirement, there is no real reason that you have to get rid of the mortgage, he said. But is it really so bad to have a mortgage payment during retirement? Your return from paying off your mortgage before retirement is lower if you’re still getting the full tax deduction for your mortgage interest. Doing a cash-out refinance might make sense, especially with relatively-low average mortgage rates. From 2007 to 2010, there was a 200% increase in the use of mortgages for families where the head of household was age 75 and older. Getting rid of your mortgage payment in retirement with a reverse mortgage. “Maintaining and managing a mortgage may actually improve retirement cash flow,” he said. 1. The table below tells us the percentage of families that still have a mortgage or home-equity loan, sorted by the age of the head of household. The amount of money you can receive from an HECM depends on how much your home is worth, how old you are, what interest rate you can get and what fees are associated with the loan.      â€¢ A Policy Surrender Value (surrender value) that increases over time. Living a comfortable retirement means balancing the desire to pay off a mortgage with the need to have a readily available source of savings to help pay for unexpected expenses. If you pay 4 percent interest on your mortgage balance each year, then paying off your balance is the same as earning a 4 percent annual return on an investment — not bad for a risk-free return, especially in today’s low-rate environment. It has been updated. About the Author - Retiring With a Mortgage, Back in 1989, just a little over a quarter of all households (26.4%) were living as "retired with a mortgage.". “The logic behind the rule of thumb is that your income will go down in retirement, so it would be helpful if your monthly expenses went down significantly as well,” said David Reiss, a law professor who specializes in real estate and consumer financial services at Brooklyn Law School in New York. The conventional wisdom is that you should pay off your mortgage before you retire. According to a study by … Paying down a mortgage might make a lot of sense; especially if it's currently invested in a certificate of deposit earning 1.5%. But others might be putting the money that could have gone toward extra mortgage payments to a better use. No mortgage … Based on the rules mentioned above, it might be tempting to use a 401(k) plan or Roth IRA to pay off a mortgage if prevailing rates of return for those plans are lower than the interest rate on a mortgage. Here are some financially shrewd reasons to carry your mortgage debt into retirement. In short, retirement mortgages are essentially a loan secured against your property that commences either prior to your retirement, or whilst in retirement. If so, paying off the mortgage sooner would be wise. Mortgage in retirement: Emotional and financial benefits. It’s also having a huge impact on our financial wellness. Fannie Mae lets lenders use a borrower’s retirement assets in one of two ways to help them qualify for a mortgage. This survey is based on the responses of 4,500 families that are representative of the economic conditions existing in the United States. The Loan Guide: How to Get the Best Possible Mortgage, Long term care & life insurance combination. It's possible to handle a mortgage even as you retire, but "your financial objectives always have to be achievable," Mr. Nagy says. Our newsletter provides insights into current events, financial tactics and ways to save. … A mortgage is typically the biggest expense in someone’s retirement … They present a reverse mortgage as a solution. It's also the reason why we recommend seeking advice from a financial planner that can help make a recommendation based on a comprehensive view of someone's overall financial condition. And they’re less likely to have their homes paid off because they’re purchasing later in life, making smaller down payments and tapping equity for other purchases.1. 2 U.S. Department of Housing and Urban Development, “Frequently Asked Questions about HUD's Reverse Mortgages,” HUD.gov. The key is that keeping your mortgage during retirement should be part of a plan and not a response to a crisis. According to a study by Harvard University, 46 percent of homeowners aged 65–79 had mortgage debt in 2016, with a median balance of $77,000. If the homeowner moves out and sells the home, the proceeds go first to toward repaying the reverse mortgage; if there is anything left, the homeowner keeps the balance.2. Many people, including myself, dream of having a “mortgage burning” party the week they retire. The homeowner makes no payments to the lender, and the homeowner remains the home’s title holder. The very thought of making my last mortgage payment makes me jump for joy. Get information and advice from a MassMutual financial professional near you. Money applied directly towards the loan's principal provides the individual with a return on investment that is equal to the interest rate on the loan. Say your marginal tax bracket in retirement will be 25 percent. Using your retirement savings to make mortgage payments could also trigger taxes. There was even a name for those celebrations; they were called mortgage-burning parties. For retirees, assets become even more … The opportunity cost would be the alternative investment. Before going from a 15-year mortgage to a 30-year mortgage, make sure your savings, Social Security payments, and other forms of income will be able to keep up with those payments well into your retirement years. The rationale is that when retired our expenses should be lower. The more your home is worth, the older you are and the lower the interest rate and fees, the higher your proceeds. Working past 65 can help boost retirement … There was a time when retiring with a mortgage was unthinkable. Yet many in their senior years do not, choosing instead to retire with a mortgage. Paying off a mortgage is a low risk investment. That means your effective mortgage interest rate is 3 percent. The survey includes demographic characteristics, as well as pension and income information. Of 60-64 year olds surveyed, … There are also emotional reasons to not pay off the mortgage. Why keep working to make your mortgage payment when you really want to retire, or retire but struggle to get by because of your mortgage payment? And if you do take a monthly mortgage payment with you into retirement, is … Foreclosure is harder to recover from when you’re older because you may not be able to return to the workforce to compensate for the loss and because you’re more likely to have health problems or cognitive impairments. Making that last payment was something to celebrate, and that achievement was shared with family and friends. As it is with many seemingly simple … COVID-19 affects more than our health and emotional wellbeing. Not having to put part of your retirement income toward a monthly mortgage payment in retirement will certainly make it easier to meet your other expenses. Paying off a mortgage is a very big decision that needs to be thoroughly evaluated before taking any action. For government, education, healthcare, and not-for-profit plans, By Amy Fontinelle Paying off the mortgage before or right at retirement is also an emotional decision. She didn't have a retirement nest egg of seven figures, either. Getting a reverse mortgage is an option for someone who needs to generate an income stream from their home equity, but means someone else has control of your asset and has set out the terms of how you can use it, diminishing your flexibility and liquidity, said Lisa M. LaMarche, co-founder of Milestone Wealth Advisors in Greenville, Delaware. (Related: Building your financial pyramid), Paying off the mortgage before retirement makes sense for some. To simplify this analysis, we'll consider families where the head of household was age 65 and older as "retired with a mortgage." Posted on Jul 9, 2020. 1 Joint Center for Housing Studies of Harvard University, “Housing America’s Older Adults,” Oct. 16, 2019. "In retirement, cash flow is king." During the mortgage term, you will need to make … The data we're using in this article was published in September 2020, and is a summary of data gathered in the years 1989 through 2019. Paying off the mortgage before retirement is a great choice for undisciplined savers who are likely to be on low fixed incomes in retirement and for people who are financially responsible but very conservative. The conventional wisdom is that you should pay off your mortgage before you retire. The information provided is not written or intended as specific tax or legal advice. If you withdraw $60,000 from your IRA to pay off your mortgage, you might end up with less than $50,000 … Opinions expressed by those interviewed are their own and do not necessarily represent the views of Massachusetts Mutual Life Insurance Company. Your home equity is unavailable for retirement cash flow and ultimately goes to your heirs. CareChoice One and CareChoice Select are whole life insurance policies with long term care riders. After all, individuals approaching retirement age don't have a lot of time to recover from a financial mishap, and making the wrong move could mean going back to work. Again, we're using the simplifying assumption that a head of household age 65 and older is "retired with a mortgage." Once that condition exists, the lost opportunity cost is the primary factor determining whether paying down (or paying off) a mortgage is a sound decision. Note:  We're going to start this section with a warning. Some 26 percent of owners age 80 and over also had mortgages, with a median debt of $43,000 Indeed, in just the years from 2007 to 2016, the share of households in their 80s and over with mortgage debt jumped by 16 percentage points.1. This decision could permanently reduce your income, … Any excess proceeds go to the homeowner’s estate, but if the amount owed is more than the home is worth, the lender has no recourse — they can’t go after you or your family for the balance. Keep in mind, though, that all equity investments involve risk. Rates will typically vary according to geographic region as well. If the homeowner passes away, the lender sells the home to pay off the reverse mortgage. Just keep in mind that higher returns are often accompanied by higher risk. Many people opt to consult with a financial professional about their retirement plans, including the possibility of supporting mortgages or investigating reverse mortgages. Paying down a mortgage with funds from your 401 (k) can reduce your monthly expenses as retirement approaches. “And if you change your mind or wish to move due to health reasons, proceeds from the sale of the property will go to the bank in order to pay off the reverse mortgage, leaving little or no money for yourself. (Related: The pros and cons of reverse mortgages), A reverse mortgage, also called a home equity conversion mortgage (HECM), turns the equity from your primary residence into a stream of monthly payments from the lender to the homeowner. But you’d be taking on more risk. Carrying a mortgage into retirement allows individuals to tap into an additional stream of income by reinvesting the equity from a home. You are encouraged to seek advice from your own tax or legal counsel. Amy Fontinelle is a personal finance writer focusing on budgeting, credit cards, mortgages, real estate, investing, and other topics. You also must continue making property tax and homeowners insurance payments for as long as you live there (if you don’t, the lender can foreclose, just like they can with a regular mortgage). These investments might include low-cost Standard & Poor’s 500 stock index funds or dividend-paying stocks from blue-chip companies: the same things you’re likely already investing in for retirement. You plan to sell your home Many people decide to downsize before or in retirement. But this retirement ideal doesn't always happen. Overall, we now have a lot more debt held by those in retirement than we did back in the late 1980s. The average interest rate on a 30-year mortgage is just above 3%, while for a 15-year fixed-rate mortgage, it’s about 2.7%, according to NerdWallet. Anyone looking to pay off a mortgage must have excess funds that can be "invested" in their loan. A paydown can also allow you to stop paying interest on the mortgage, … To find out the specific requirements, I interviewed Patrick Gavin, Branch Manager & VP of Mortgage Lending at Guaranteed Rate, the 10th largest privately held mortgage … A home equity loan or line of credit would also accomplish that goal, but you’ll likely pay a higher interest rate. The other is the desire to get a safe return on investment. Cashing out your equity gives you more money to work with in retirement. Fleming said continuing to make regular monthly mortgage payments but investing any excess income you would otherwise use to pay off your mortgage can be a good option for disciplined savers who are good at investing and for people who are uncomfortable without a lot of money in savings. Whether to carry mortgage debt into retirement is a perennial hot topic among financial advisers and their clients. Unfortunately, these decisions are not that simple. All rights reserved. You can either get a single lump sum at closing to pay off your existing mortgage, or if your existing mortgage has a low balance, you can get a smaller lump sum to pay off your loan plus a line of credit to draw on in the future, if and when you need it. You can get a mortgage once you are retired. Similarly, if an investment can earn a higher rate of return than the interest rate charged on a mortgage, then making the investment is a better choice. Next, we'll talk about the various factors to consider when deciding if paying off a mortgage is a good idea. Low rates can be achievable if you have excellent credit and are willing to shop around. One of our financial professionals can contact you to discuss taking care of loved ones, a family business, or a group of employees. More than 50% of retirees have a mortgage, and 36% of current workers expect to carry a mortgage payment into retirement. Refinance your mortgage today. If paying off the mortgage would mean seriously depleting your savings, you might feel more comfortable keeping that money in your bank or brokerage account than tying it up in your home. Some pre-retirees and retirees might be wondering if it makes any sense to pay off the mortgage on their home in the current low-interest environment. If you’re nearing retirement age and you want to pay your home off early, the best way to do this could be to get a mortgage refinance at a record-low rate. Even more incredible, when the head of household was age 65 to 74, there was a 415% increase in the size of the loan from 1989 ($25,900) to 2007 ($133,500). Putting all this together, for the one in five households carrying a mortgage into retirement, paying the mortgage off is likely to take a big bite out of their retirement savings. ©2020 Massachusetts Mutual Life Insurance Company (MassMutual®), Springfield, MA 01111-0001. One emotional component of the decision is the desire to be debt free. Based on this second set of data, we can conclude: Based on these two sets of data, we know the number of retirees with mortgages has been increasing. Opinion: We still owe $46,000 on our mortgage — should we deplete savings to pay it off before we retire in 2021? With rates low and inventory in many … “Having no mortgage payment is certainly good, and if the homeowner is likely to just blow the money anyway, it's a good choice — sort of a forced savings account that pays dividends in the form of no housing payment,” said Casey Fleming, a mortgage advisor with C2 Financial Corp. and author of “The Loan Guide: How to Get the Best Possible Mortgage”. When the interest rate on a mortgage is lower than an alternative "risk-free" investment such as a certificate of deposit, then it's better to invest in the CD than pay down the mortgage. For example, retirees no longer have a commuting expense to travel back and forth to work each day. When it comes to opining on seniors carrying debt into retirement, I’ll state upfront my personal bias that anyone with credit-card debt — or even mortgage debt — has no business … Do you plan to stay in your current home after you retire? In the end, anyone trying to figure out if retiring with a mortgage is a good idea will need to consider: The ideal situation is when someone has a relatively large sum of money in the bank and a modest mortgage. Since this is true, we can make two generalizations: One of the simple rule of thumb used by many financial planners is that we need to have enough resources to replace 70 to 80% of our income when retired. Some retirement-age homeowners who haven’t paid off their mortgages undoubtedly would rather be debt free but couldn’t afford to retire their home loan sooner. This is a 76% increase in just 18 years. Still, you may be hesitant to head into retirement bliss with a house payment on your back. Besides doing a cash-out refinance or getting a home equity loan or line of credit, there’s another way to tap your home’s equity for retirement income: a reverse mortgage. Yet many in their senior years do not, choosing instead to retire with a mortgage. If the borrower is already using the asset, such as a 401 (k), to receive retirement income, the borrower must demonstrate that they will continue to receive regular income from that asset for at least three … Your mortgage payment may be dropping by $300 per month, but you have to consider the total cost of that mortgage … Last Updated: Dec. 5, 2020 at 1:22 p.m. Having less accumulated net wealth is a problem, especially if most of your wealth consists of your home equity, which is less liquid than stocks, bonds and cash. If someone is carrying high cost loans such as credit card debt, then it makes sense for them to pay off a credit card before turning their attention to a mortgage. But paying down a mortgage by pulling a large sum of money from a 401(k) or 403(b) account can also trigger a hefty year-end tax bill. For example, someone could choose to invest in the stock market instead of paying off the loan on their home. A reverse mortgage … ____________________________________________. A mortgage is typically the largest loan carried by a household. Finally, we'll expand that thought process into a retirement planning scenario. For many near-retirees, the decision to pay off the mortgage before retiring is more emotional than financial. For example, you could aim to pay off your mortgage in the next three or four years and take money out of your retirement accordingly. Every three years, the Federal Reserve Board publishes its Survey of Consumer Finances (SCF). MassMutual, its employees and representatives are not authorized to give tax or legal advice.      â€¢ A death benefit More homeowners are retiring with a mortgage, More homeowners are retiring with a mortgage than a decade earlier, according to Harvard’s research. Retirement brings with it a myriad of financial decisions, such as whether or not a reverse mortgage is a solution for quick access to cash for bills or just about any other reason. 1 . You must be at least 62 and have enough equity in your home to qualify for a reverse mortgage. When the interest rate on a mortgage is higher than an alternative "risk-free" investment such as a certificate of deposit (CD), then it's better to pay down the mortgage than invest in the CD. The 2016 and 2019 data sustains the continuous climb in mortgage and home equity loans. How would a disability affect my finances? That’s the real risk-free return you get from paying off your mortgage. Some reverse mortgage lenders advertise getting rid of your monthly mortgage payment as a reason to take out a reverse mortgage. College: Prep, acceptance, attendance, and after, Understanding life insurance: Types, terms and uses, Product/Fund Performance & Regulatory Documents, Modal Charge Disclosure and APR Calculator. “Paying off the mortgage at retirement is rarely beneficial,” said Certified Financial Planning™ professional David M. Williams, director of planning services for Wealth Strategies Group in Cordova, Tennessee. This article was originally published July, 2016. The observations we can make based on this research include: In our second set of data, we're going to look at how much debt these retirees are carrying. Even if the numbers suggest someone would be financially fine having some sort of a mortgage while retired, … This rule was also developed at a point in time when very few retirees had a mortgage to worry about each month. In this article, we're going to discuss the pros and cons of retiring with a mortgage. The average mortgage, or home equity loan, for retired families where the head of household was age 75 and older increased in size 136% from 1989 ($33,900) to 2007 ($80,100). If possible, apply well before you retire; many people will find it easier to qualify based on their working income than based on their retirement income and assets. (Related: Will your 401(k) be enough?). By 2007, nearly half (46.5%) of all households could be classified in the same manner. We'll begin by citing some government-sponsored research that provides several interesting statistics on the number of retirement age individuals that are still paying off the loans on their homes. And a big knock on reverse mortgages is that to account for the interest that will accrue on the loan over the years plus the loan’s closing costs, the money you receive up front might only be half or less of what your home is worth.6 Reverse mortgages also limit your flexibility. That's why we mentioned in the beginning of this article the answer to this question is not straightforward. The last thing anyone would want to do is pay off a mortgage, and then be forced to take out a home equity loan to pay for medical expenses. Ideally, you'd retire without owing money on a mortgage, car loan or credit card. But a life-long mortgage payment, for all but the affluent, is a big strain on retirement finances. There was a time when retiring with a mortgage was unthinkable. The key is to invest in secure, long-term, high-yield investments that will give you a nest egg for making your mortgage payments in retirement. 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