Mortgages in Retirement: Good or Bad?

Posted by  on Oct 18, 2010

If you're retired or coming up for retirement, you may well be wondering whether you should--if you can--pay off your mortgage, or whether you'd be better off carrying on with it. The short answer is that your best move will depend entirely on your personal circumstances, which isn't a very helpful response. However, the good news is that it's not all that difficult to reach an informed decision.

Mortgages in Retirement

Back in July 2009, the Center for Retirement Research (CRR) at Boston College published a report, entitled "Should You Carry a Mortgage into Retirement?". It found that, in 2007, 41 percent of householders who were 60-69 year old still had mortgages. Of those, just over half could have--had they wanted to--repaid the loan out of savings and investments.

Anthony Webb, the research economist who wrote the paper, concluded that the number of retired households that would be better off keeping their mortgages was fairly small. In order to benefit from doing so, you would probably have to be making an exceptionally high return on your investments (which is likely to mean that they're riskier than most retirees should be comfortable with), and be in an unusually beneficent tax situation.

Of course, much has changed since that CRR paper was written, and current mortgage rates--being at or near all-time lows--will have altered the math somewhat. The problem is, the returns you're probably getting on the safe savings and investments that retirees generally favor are also likely to have shrunk. So Anthony Webb's warning is likely to remain true: "For almost all households, the after-tax cost of the mortgage is going to be more than the after-tax rate of return on those low-risk or risk-free assets."

The Importance of Liquidity

Of course, some seniors would prefer to sacrifice their maximum income potential in exchange for the additional liquidity that a mortgage can provide. After all, retirement is a time when demands for cash--especially for medical expenses, and the support of struggling family members--can be particularly high. But Anthony Webb sees this as a poor reason for keeping a mortgage:

One argument that is sometimes cited in favor of not repaying the mortgage is that retaining a mortgage increases the household's liquidity, and enables it to better cope with sudden unexpected expenses. But households that retain a mortgage need to consider what they would do if the bad event actually happened - i.e., how they would maintain their mortgage payments once their financial assets had been spent.

Home equity line of credit, or reverse mortgage: two alternatives

If that bad event does occur after you've paid off your mortgage, then there are alternative ways of tapping into the equity that you've built up in your home. A home equity line of credit can tide you over a small emergency, or keep you going until you downsize if you're facing a long-term disaster.

A reverse mortgage is a more serious step that requires careful consideration. One of these shouldn't normally be used to fund a lavish lifestyle, but can be a lifesaver in an emergency. You can receive a lump sum, but never have to make monthly payments. It--along with the interest accrued--is repaid out of the proceeds of your home's sale, either when you move or die. If you have kids, a reverse mortgage is likely to have a big impact on their (with luck, very distant) inheritance, so you may want to discuss your plans with them before signing up.

Compare mortgage rates

Whatever strategy you decide is best for your retirement, if it involves a mortgage, make sure that you're continuing to get the best possible deal. To begin that process, compare mortgage rates here.


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