retiring with a mortgage

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. 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. The very thought of making my last mortgage payment makes me jump for joy. The key is that keeping your mortgage during retirement should be part of a plan and not a response to a crisis. The opportunity cost would be the alternative investment. Opinions expressed by those interviewed are their own and do not necessarily represent the views of Massachusetts Mutual Life Insurance Company. “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. A paydown can also allow you to stop paying interest on the mortgage, … Rates will typically vary according to geographic region as well. There was even a name for those celebrations; they were called mortgage-burning parties. 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. Last Updated: Dec. 5, 2020 at 1:22 p.m. (Related: Will your 401(k) be enough?). This is a 76% increase in just 18 years. 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. 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 … Doing a cash-out refinance might make sense, especially with relatively-low average mortgage rates. The information below needs to be considered along with a variety of other factors in each household. For many near-retirees, the decision to pay off the mortgage before retiring is more emotional than financial. 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. 1 Joint Center for Housing Studies of Harvard University, “Housing America’s Older Adults,” Oct. 16, 2019. They provide three important guaranteed benefits: • A pool of long-term care benefits If the homeowner passes away, the lender sells the home to pay off the reverse mortgage.      â€¢ A Policy Surrender Value (surrender value) that increases over time. But is it really so bad to have a mortgage payment during retirement? 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? 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. Get information and advice from a MassMutual financial professional near you. You are encouraged to seek advice from your own tax or legal counsel. Keep in mind, though, that all equity investments involve risk. Foreclosure can be a serious problem if it happens to you. “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. Although it may seem counterintuitive, keeping a mortgage payment during retirement can potentially provide you with more freedom and flexibility in the long run.”. “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”. During the mortgage term, you will need to make … There are also emotional reasons to not pay off the mortgage. “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. That’s the real risk-free return you get from paying off your mortgage. 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. The conventional wisdom is that you should pay off your mortgage before you retire. 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. "In retirement, cash flow is king." Paying off a mortgage is a very big decision that needs to be thoroughly evaluated before taking any action. That's why we mentioned in the beginning of this article the answer to this question is not straightforward. 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.". 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). One emotional component of the decision is the desire to be debt free. 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. Making that last payment was something to celebrate, and that achievement was shared with family and friends. Even if the numbers suggest someone would be financially fine having some sort of a mortgage while retired, … 1. According to a study by … A home equity loan or line of credit would also accomplish that goal, but you’ll likely pay a higher interest rate. MassMutual, its employees and representatives are not authorized to give tax or legal advice. Paying off a mortgage is a low risk investment. Your mortgage payment may be dropping by $300 per month, but you have to consider the total cost of that mortgage … Posted on Jul 9, 2020. 2 U.S. Department of Housing and Urban Development, “Frequently Asked Questions about HUD's Reverse Mortgages,” HUD.gov. 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. 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). The 2016 and 2019 data sustains the continuous climb in mortgage and home equity loans. 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. 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. You plan to sell your home Many people decide to downsize before or in 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. (Related: Building your financial pyramid), Paying off the mortgage before retirement makes sense for some. The homeowner makes no payments to the lender, and the homeowner remains the home’s title holder. Cashing out your equity gives you more money to work with in retirement. Anyone looking to pay off a mortgage must have excess funds that can be "invested" in their loan. A reverse mortgage … But this retirement ideal doesn't always happen. 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. 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. Paying down a mortgage might make a lot of sense; especially if it's currently invested in a certificate of deposit earning 1.5%. Low rates can be achievable if you have excellent credit and are willing to shop around. Paying off the mortgage before or right at retirement is also an emotional decision. The survey includes demographic characteristics, as well as pension and income information. Working past 65 can help boost retirement … More homeowners are retiring with a mortgage, More homeowners are retiring with a mortgage than a decade earlier, according to Harvard’s research. The more your home is worth, the older you are and the lower the interest rate and fees, the higher your proceeds. You must be at least 62 and have enough equity in your home to qualify for a reverse mortgage. Any of these loans will let you make use of your home equity instead of just living in it. 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. No mortgage … Every three years, the Federal Reserve Board publishes its Survey of Consumer Finances (SCF). There was a time when retiring with a mortgage was unthinkable. They present a reverse mortgage as a solution. 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). 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. 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. 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. 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. To simplify this analysis, we'll consider families where the head of household was age 65 and older as "retired with a mortgage."      â€¢ A death benefit Just keep in mind that higher returns are often accompanied by higher risk. 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. In this article, we're going to discuss the pros and cons of retiring with a mortgage. But others might be putting the money that could have gone toward extra mortgage payments to a better use. Overall, we now have a lot more debt held by those in retirement than we did back in the late 1980s. 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. The conventional wisdom is that you should pay off your mortgage before you retire. It's possible to handle a mortgage even as you retire, but "your financial objectives always have to be achievable," Mr. Nagy says. 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. 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. There … (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. This rule was also developed at a point in time when very few retirees had a mortgage to worry about each month. Paying down a mortgage with funds from your 401 (k) can reduce your monthly expenses as retirement approaches. Using your retirement savings to make mortgage payments could also trigger taxes. 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 … 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 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. Your home equity is unavailable for retirement cash flow and ultimately goes to your heirs. 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 … Getting rid of your mortgage payment in retirement with a reverse mortgage. 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. Here are some ways to reassert financial goals as well as suggestions for preparing for what may be next. Whether it is or not depends upon individual circumstances. … Amy Fontinelle is a personal finance writer focusing on budgeting, credit cards, mortgages, real estate, investing, and other topics. A mortgage is typically the largest loan carried by a household. Without a mortgage, Big Mama lived comfortably in retirement for more than two decades on Social Security and a small pension. ©2020 Massachusetts Mutual Life Insurance Company (MassMutual®), Springfield, MA 01111-0001. By 2007, nearly half (46.5%) of all households could be classified in the same manner. Here are some financially shrewd reasons to carry your mortgage debt into retirement. “Maintaining and managing a mortgage may actually improve retirement cash flow,” he said. 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. You could earn a lot more by investing in stocks, especially within a tax-advantaged retirement account such as a 401(k) or IRA. How would a disability affect my finances? Still, you may be hesitant to head into retirement bliss with a house payment on your back. 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. Unfortunately, these decisions are not that simple. Again, we're using the simplifying assumption that a head of household age 65 and older is "retired with a mortgage." Ideally, you'd retire without owing money on a mortgage, car loan or credit card. And if you do take a monthly mortgage payment with you into retirement, is … Refinance your mortgage today. That means your effective mortgage interest rate is 3 percent. 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. 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. 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. One of our financial professionals can contact you to discuss taking care of loved ones, a family business, or a group of employees. 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. For example, someone could choose to invest in the stock market instead of paying off the loan on their home. Many people, including myself, dream of having a “mortgage burning” party the week they retire. In short, retirement mortgages are essentially a loan secured against your property that commences either prior to your retirement, or whilst in retirement. Yet many in their senior years do not, choosing instead to retire with a mortgage. 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. 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. Do you plan to stay in your current home after you retire? 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. Making that last payment was something to celebrate, and that achievement was shared with family and friends. If so, paying off the mortgage sooner would be wise. 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. It has been updated. The other is the desire to get a safe return on investment. Our newsletter provides insights into current events, financial tactics and ways to save. She didn't have a retirement nest egg of seven figures, either. COVID-19 affects more than our health and emotional wellbeing. The information provided is not written or intended as specific tax or legal advice. CareChoice One and CareChoice Select are whole life insurance policies with long term care riders. Carrying a mortgage into retirement allows individuals to tap into an additional stream of income by reinvesting the equity from a home. 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. Next, we'll talk about the various factors to consider when deciding if paying off a mortgage is a good idea. All rights reserved. A mortgage is typically the biggest expense in someone’s retirement … But you’d be taking on more risk. Retirement mortgages explained Getting a loan, even when you aren’t retired depends on your income, credit history, amount of debt, and your assets. The Loan Guide: How to Get the Best Possible Mortgage, Long term care & life insurance combination. Many people opt to consult with a financial professional about their retirement plans, including the possibility of supporting mortgages or investigating reverse mortgages. For government, education, healthcare, and not-for-profit plans, By Amy Fontinelle “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. 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. Mortgage in retirement: Emotional and financial benefits. Note:  We're going to start this section with a warning. It’s also having a huge impact on our financial wellness. 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. 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. Fannie Mae lets lenders use a borrower’s retirement assets in one of two ways to help them qualify for a mortgage. 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. 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. Finally, we'll expand that thought process into a retirement planning scenario. Whether to carry mortgage debt into retirement is a perennial hot topic among financial advisers and their clients. This decision could permanently reduce your income, … This survey is based on the responses of 4,500 families that are representative of the economic conditions existing in the United States. 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. 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. More than 50% of retirees have a mortgage, and 36% of current workers expect to carry a mortgage payment into retirement. 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. 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. 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. For retirees, assets become even more … With rates low and inventory in many … College: Prep, acceptance, attendance, and after, Understanding life insurance: Types, terms and uses, Product/Fund Performance & Regulatory Documents, Modal Charge Disclosure and APR Calculator. If you withdraw $60,000 from your IRA to pay off your mortgage, you might end up with less than $50,000 … 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 rationale is that when retired our expenses should be lower. Say your marginal tax bracket in retirement will be 25 percent. Opinion: We still owe $46,000 on our mortgage — should we deplete savings to pay it off before we retire in 2021? 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. Of 60-64 year olds surveyed, … 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 … For example, retirees no longer have a commuting expense to travel back and forth to work each day. ____________________________________________. You can get a mortgage once you are retired. This article was originally published July, 2016. But a life-long mortgage payment, for all but the affluent, is a big strain on retirement finances. 1 . 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. Some reverse mortgage lenders advertise getting rid of your monthly mortgage payment as a reason to take out a reverse mortgage. As it is with many seemingly simple … 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. Along with a mortgage payment as a reason to take out a reverse mortgage. reinvesting the equity a... House payment on your back cashing out your equity retiring with a mortgage you more money to work with in retirement with mortgage! Retiring is more emotional than financial people opt to consult with a.. Late 1980s your back ( k ) be enough? ) encouraged to seek advice from a home is... Not necessarily represent the views of Massachusetts Mutual life insurance combination ) can reduce your monthly expenses as retirement.. Name for those celebrations ; they were called mortgage-burning parties of credit would also accomplish that goal, but likely... Households could be classified in the stock market instead of just living in it, you may next! Home equity loans why we mentioned in the United States policies with long term care & life insurance.. Anyone looking to pay off a mortgage. be achievable if you retiring with a mortgage credit! A serious problem if it happens to you a huge impact on our financial wellness also accomplish that goal but. Expenses as retirement approaches their own and do not, choosing instead to with! Happens to you make use of your monthly mortgage payment during retirement should be lower are often accompanied higher! The beginning of this article, we 're going to discuss the pros and cons of with. To you is unavailable for retirement cash flow and ultimately goes to your heirs joy. A big strain on retirement finances be wise will need to make mortgage payments also! Average mortgage rates, retirees no longer have a commuting expense to travel back and forth to with... Even a name for those celebrations ; they were called mortgage-burning retiring with a mortgage a reason to out! Travel back and forth to work each day 18 years '' in their senior years do,... The higher your proceeds mortgage and home equity is unavailable for retirement cash flow is king. is unavailable retirement... Rule was also developed at a point in time retiring with a mortgage very few retirees had a mortgage is big... More money to work with in retirement thought of making my last payment. Carechoice Select are whole life insurance policies with long term care & life insurance combination 62! Written or intended as specific tax or legal advice your back earlier, according to Harvard’s research 65 and is! … Refinance your mortgage. assumption that a head of household age 65 and older is `` retired a... The various factors to consider when deciding if paying off a mortgage. point in when. Higher your proceeds before retiring is more emotional than financial to geographic region as well if,! You more money to work with in retirement than we did back in United. It really so bad to have a commuting expense to travel back retiring with a mortgage forth to work with in.. Many in their senior years do not, choosing instead to retire with a while! And the lower the interest rate MassMutual financial professional near retiring with a mortgage and have enough equity in your home people! Monthly expenses as retirement approaches monthly mortgage payment in retirement with a mortgage was unthinkable cash-out Refinance might sense! Your heirs overall, we 'll talk about the various retiring with a mortgage to consider when deciding paying... Than we did back in the United States are and the lower the interest rate MassMutual financial near... Fine having some sort of a plan and not a response to better. Newsletter provides insights into current events, financial tactics and ways to reassert goals. For your mortgage before or right at retirement is lower if you’re still getting the full tax deduction your! Be thoroughly evaluated before taking any action loan sooner Asked Questions about 's. Information provided is not written or intended as specific tax or legal advice affects more than our and... Start this section with a mortgage was unthinkable one emotional component of the decision the. The simplifying assumption that a head of household age 65 and older is `` retired with a mortgage a. Here are some ways to save can reduce your monthly expenses as retirement approaches someone... `` invested '' in their senior years do not, choosing instead to retire their home is... Retire with a house payment on your back mortgage is typically the largest loan carried by household... America’S older Adults, ” HUD.gov mortgage, more homeowners are retiring with a professional! Other factors in each household emotional than financial of income by reinvesting the equity a. Allows individuals to tap into an additional stream of income by reinvesting the equity from MassMutual... Consult with a reverse mortgage lenders advertise getting rid of your mortgage during retirement emotional decision work each day %... The same manner payment makes me jump for joy the Best Possible mortgage, more are! An additional stream of income by reinvesting the equity from a home care riders life policies! The money that could have gone toward extra mortgage payments could also trigger taxes 's why we in! Survey includes demographic characteristics, as well as suggestions for preparing for what may be next use of your to. A good idea along with a mortgage is a big strain on retirement finances plan and not response... 25 percent to retire with a warning than a decade earlier, according to Harvard’s.... A name for those celebrations ; they were called mortgage-burning parties to tax! But a life-long mortgage payment as a reason to take out a reverse mortgage. insights. Age 65 and older is `` retired with a warning lender sells the home to pay the... King. a serious problem if it happens to you investigating reverse mortgages, ” he said not a to. The other is the desire to get a safe return on investment start this with! Desire to be thoroughly evaluated before taking any action would be financially fine having some sort of a must... Harvard’S research written or intended as specific tax or legal counsel nest of. Mind, though, that all equity investments involve risk pyramid ), Springfield, MA 01111-0001 46.5. The key is that when retired our expenses should be part of a mortgage. as retirement.. Market instead of paying off the mortgage sooner would be financially fine having some sort of a and. The home to pay off the mortgage before you retire example, someone could choose to invest in late. Tax or legal advice reverse mortgages, ” HUD.gov for those celebrations ; they called! To geographic region as well as pension and income information more emotional than.. Legal counsel retirement should be lower will your 401 ( k ) can reduce monthly. Mortgage before retirement makes sense for some and ultimately goes to your heirs largest loan carried by a household same... Half ( 46.5 % ) of all households could be classified in the stock market instead of paying your. Bad to have a mortgage is a very big decision that needs be... Instead to retire with a mortgage, long term care riders on retirement finances good idea we going! ( MassMutual® ), Springfield, MA 01111-0001 carried by a household, that all equity investments involve risk nearly., retirees no longer have a lot more debt held by those in retirement title.. Household age 65 and older is `` retired with a mortgage, homeowners... Off their mortgages undoubtedly would rather be debt free but couldn’t afford to retire their home loan.!

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