November 9, 2017

I'm Retiring...How About My Mortgage?

Whether to pay off a mortgage before or just after retirement is a topic I have addressed before. But, it is such a major decision, I get at least one email every few weeks asking my advice. No wonder. With nearly 30% of all those 65+ having monthly mortgage payments, it is important to make the best choice for you. 

As I write this, the picture is anything but clear. Plans for a tax cut are bouncing around the halls of Congress. As of now, mortgage interest deductions would be protected. But, an increase in the standard deduction and a change in personal deductions might be coupled with the loss of real estate tax deductions, making house ownership potentially more expensive for some. 

So, for purposes of this post, let's stick with how things are right now. After the dust settles in Washington and there is clarity (?) I might do a followup to adjust to the new reality.

Retirement brings its own unique set of concerns and decisions. Near the top of many lists is a decision about housing. Is it best to pay off the mortgage before retirement, or is that extra money better off being invested? If I pay off the house won't I lose a major tax deduction? But, what if I have a major health expense and can't pay the mortgage..could I end up retired and homeless?

Good questions with no clear cut answers. But, they are worth asking and taking a look at some of the ramifications. As an obvious disclaimer, I am not a tax expert or a financial guru, so what I offer is opinion and some basic thoughts from my own research. Please think through your own situation carefully, consult a trusted adviser, and proceed with caution.


If you do a Google search about retirement and mortgages the majority of the sites and articles that rise to the top suggest paying off your home loan before retirement. They do admit that many people can't do that, but it should be a goal.




 The reasons most often cited to pay off your mortgage:


1. Peace of mind. Even without a monthly payment you still have real estate taxes, HOA fees, maintenance, repairs and upgrades. But, if you delay fixing a leaking toilet for two months you won't risk losing your home. That big monthly Must Pay bill is gone.

2. Home equity is available. I strongly suggest this source of cash be used only for major repairs and upgrades to your property or something like a large medical expense. Home equity is not a piggy bank so you can take a 12 day cruise to Hawaii or buy a new truck. Too many people got stuck when they spent their home equity only to find the worth of the house dropped below the size of the loan during the 2008-10 recession. But, with home equity lines of credit at  low interest rates you may save thousands in interest over more conventional loans.

3. You have more freedom to relocate or resize. Get in trouble with your mortgage and someone else might tell you when to move. Have no mortgage and you can decide when to downsize, move closer to the kids....or stay put.

4. You have a large source of retirement money available. If you move to a smaller home or condo or even rent an apartment, any profits after the house sale and purchase are yours (up to a very generous level set by the Federal government). Though expensive and sometimes risky, reverse mortgages can provide a steady income from the equity you have in your residence too. This tactic requires an expert to prevent a serious mistake, however.


On the other side of the argument, these points are made:


1. Don't pull  money from other investments to pay off a cheap mortgage. Even losing the tax deduction of a mortgage may not be enough to make up for better performing investments. If you take a chunk of your retirement funds to pay off a mortgage the money left will not produce as much income or growth.


2. Tying up too much of your net worth in an illiquid asset. You own a $300,000 home free and clear. But, depending on the market conditions it might take you 6-9 months or more to be able to sell the house and see any net profits. If you need quick cash a house is not the place to find it (except through a home equity loan which comes with its own risks).

3. If you have other high interest debts, like credit cards or auto loans, pay those off first to reduce the amount you are losing each month in high interest charges. Only after those debts are satisfied should you consider retiring your home's mortgage.


Another consideration lies in what your plans are about an eventual move. I know that at some point Betty and I  want to move into a continuing care community (CCC). The "buy-in" will be somewhere around $250,000. If we own a home or condo and need to move rather quickly into the CCC because of health issues, our buy-in money will be unavailable until we sell. That may be too late. We are willing to take that risk for now, but will probably move into such a community sooner rather than later.


Again, I will remind you I am not a financial planner or expert. I have bumbled along pretty well for the past several decades, but there is always more to learn and consider. If you are a financial planner, investment guide, or CPA I welcome your input (as long as you aren't trying to sell something!). 

All that said, you have thoughts, concerns, questions, and insight that will help of of us, expert or no. Please add your comments to this important subject. Since a home is generally the biggest expense for most of us in our lifetime, knowing what to do with that resource is vital.


30 comments:

  1. Good points! After watching some relatives almost have their home go into foreclosure, I would add to think carefully about how you would pay the bills on a home (mortgage or not)if your are currently relying on the retirement income of 2 people and that changed so you only had one income. The death of a spouse and the subsequent loss of one Social Security check and perhaps other income could make paying a mortgage impossible.

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    1. That is an excellent observation. Owning a home without a mortgage does not end someone's financial responsibilities. In many parts of the country property taxes can be just as high as a monthly mortgage payment. Add in insurance, maintenance, and needed upgrades and owning a home requires a decent income.

      If income is cut due to a death or divorce, the inability to pay all those costs could have very serious consequences.

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  2. About the only item I would argue with is "Don't pull  money from other [better performing] investments to pay off a cheap[er] mortgage"

    All investments have their ups and downs and what is better performing now may not be so in the future. That's why the SEC requires all mutual funds to tell investors that "Past performance does not necessarily predict future results". The fact is that all investments carry risk (including your house if you think of it as an "investment") but you always need somewhere to live. If you own your house free and clear then you'll always have somewhere to live. To me that reduces risk and provides peace of mind, which seems doubly important in retirement with your best earning-potential days behind you. That's my take on it anyway.

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    1. I am in your camp; I bought my last two houses for cash and have had no mortgage for the last 13 years. I sleep much better at night.

      However, I can see the argument from the other side. If a mortgage is 3% but you are averaging 6 or 7% from the invested cash, that might make it best to make money off the money that didn't pay down the mortgage. Yes, there is risk, but show me any investment where there is none...including the value of a fully paid house.

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  3. Everything I've read says that the proposed changes in the tax law (assuming they're even passed which is a big assumption) will have a near-zero effect on housing, even in high-priced, high-tax places like NYC and San Fran. As far as paying off a mortgage goes . . . good subject. You've put your finger on the pros and cons . . . and then it depends on your individual situation.

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    1. I would never presume to guess what will come out of Washington. That is a fool's game.

      Yes, I agree, Tom, that this is an area where someone must weigh the pros and cons, along with their own feeling about risk and security. The decision is an individual one.

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  4. Hi Bob! Good to know that this question is on the minds of many people because I think it affects more elements of a quality life than most others. When my husband and I went totally mortgage and debt free 8 years ago it was one of the BEST things we ever did. You mention "peace of mind" as one of the benefits but I would have to add that it is more than that--it is an incredible sense of freedom from the rat race. Of course included in that move was also a decision to "rightsize" (we like that word far more than "downsize" because it implies choice and benefit rather than sacrifice). By selecting a smaller home (not tiny!--smaller) in a very walkable and service oriented area, we have no HOA dues, our taxes are reasonable, our utitlities nicely managed (with solar) and there is no where in the entire world we could live cheaper and as well as we do. And we think it is a fallacy to not pay off your mortgage just for a mortgage deduction benefit. Paying off your mortgage saves you far, far more than any deduction provides. That's like buying clothes on sale because you saved so much money. far better not to buy at all! When we made the rightsizing move 8 years ago we have managed to save (and invest) over $30K every years since and now that money is in other investments generating cash flow. Like the book "Rich Dad, Poor Dad" a home is always an expense (not an investment). Learning to manage that economically for a quality life frees up a person so much. I guess you can tell that I'm a cheerleader for a mortgage free house!!! I look forward to hearing what everyone else thinks. ~Kathy

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    1. One of the points you make is one that always causes me to chuckle when shopping at certain stores. The clerk gleefully informs you, "You have saved $104.87 today." Well, I still spent $93. That part of reality tends to be ignored!

      A I noted in the comment above we have been mortgage free for 13 years and it is tremendously liberating. Our property taxes are low by national standards, utilities are quite reasonable and HOA fees very low (of course, they don't do a lot!). We "rightsized" from 3200 sq ft 13 years ago to 1800 sq ft. That isn't small, but certainly is better for the two of us.

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    2. Could I ask where you live so affordably? I am close to retirement and am considering a move to "rightsize". Sherry

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    3. Hi Anonymous! I didn't know if you were asking Bob or asking me? But if you want to know I live in La Quinta, CA. There are still affordable homes here compared to most of Southern California although we were fortunate to buy during the recession. IMHO right now if I were to do it again would be to sell now (prices are high) and rent for a while. I've been part of the real estate business for over 30 years and one thing I know FOR SURE is that prices go up and prices go down. Timing has a lot to do with it. ~Kathy

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    4. And, if you asking me, the answer is the Phoenix, AZ area. Housing prices are low compared to the national average, utilities are reasonable, and property taxes are quite low compared to most places in the country.

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  5. I understand the arguments on both sides, most of which tend to be financial for obvious reasons. That being said, I have always paid off mortgages as quickly as possible on the three homes we have had over the years, especially as we neared early retirement in our current abode. The peace of mind that comes from having a paid off home cannot be calculated or put into a spreadsheet; you either want the peace of mind or you don't. By not having that large payment, probably the largest recurring payment the vast majority of us will have in our lives, it frees one up to do so much more. Count me in the camp of those who vote "pay it off before retirement".

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    1. Me, too. When I shut down my business in 2001, one of the first realities was that the mortgage on our house was too high for me to pay without that steady income. We sold at a good price and bought the next, much smaller house for cash. A little over 2 years ago we repeated the process, selling that house for a nice profit and bought our current home for cash. We will stay in this one until we feel it is time to move into a retirement community.

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    2. Hi Bob, I would love it if you wrote a article on retirement home options. Like you wrote a CCC and I did not know what that was. Aging choices might be better than retirement. As we age and need more care maybe, what are all the choices? Thank you. Sherry

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    3. I have written a few posts on that subject over the past several years but I will look into an update sometime soon. CCC stands for Continuing Care Community. Those are retirement places that have independent living, assisted living, and nursing care facilities. As folks age they move from independent to assisted living, and finally into nursing care facilities.

      Here are a few posts that may help you. Copy the shortened web address, paste it into your browser and you will be taken directly to these two posts:

      https://goo.gl/P3t5DG

      https://goo.gl/iaEG96

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  6. I paid off my mortgage years ago with money left to me after my mother died. Like others who live debt free, I find tremendous freedom and peace of mind in not having to pay off loans of any sort. Whatever I might have lost in tax benefit is more than made up in other ways. (I like Kathy's analogy of buying clothes on sale.) As others have observed, it is a personal decision based on individual circumstances, most of which may be financial, but there is also an emotional component that should be considered in the mix.

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    1. I want to highlight one point you made: the mortgage deduction is never worth more than not making monthly payments. If it were a tax credit, maybe. But, as a deduction the amount potentially saved in taxes never comes close to the total dollar amount of both principal and interest paid over that year.

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  7. We "own" our home, or our bank is letting us live here as long as we send them our monthly "tithe." We decided to carry a mortgage in retirement because we have a good income and we enjoy a lifelong understanding of a "household budget." We decided to keep our cash to ourselves. If our mortgage costs us 3.75% and our investments are earning 6%+ each year, I think we are better off? I use the question mark here because I have no idea if we are better off-- I just think we are. And we like the deduction.

    I love your columns because they stop me and make me think and force me to nudge my gray matter into gear.

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    1. Well, that should give you a 2.25% positive growth curve, not counting any taxes you save on the mortgage deduction. So, if you are comfortable then it is the right decision for you.

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    2. We are retired and have two homes with a total of $490000 mortgages and would never consider paying them off any faster than necessary. The rates are 2.75% and 3.375% but my investments average 9% per year over the past 20 years. I would have lost out on over $1500000 in investment gains if I focused on early paying mortgages. That is liberating to me to reach FI with a high net worth.

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  8. Living in Arizona is a real plus in retirement.Low property taxes and healthy outdoors lifestyle available. We are old school and felt that to retire we wanted our debts paid and our home free and clear, so that is what we did.We sleep a lot easier at night with the freedom of no debts. (Even when we made a left hand turn and move dup North fora bit-- it did not incur debt, in fact we MADE MONEY by renting our Gilbert home while we experimented..) We also right sized in 2012 from a large home with a pricey HOA to one that's smaller, but not cramped by any means (smaller is relative here in Arizona where houses were built big due to so much land available years ago!!) We have less HOA, and all the things we DO want in retirement: we still enjoy caring for a yard and having a pool and hot tub makes us feel we are on permanent vacation. Debt free just feels so darned good. No more moves for us,till we're much older and perhaps would look at Friendship Village. No more debts either.Also--we NEVER took home equity out of our homes..old school in that regard too.. your house is not a piggy bank!! Feeling blessed we've come as far as we have,even though we made a few "mistakes" along the way--we mostly kept to our big picture plan.

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    1. We took out a home equity loan once early in my retirement to help with paying off an auto loan that had a much higher interest rate. Then, we paid off the H.E. loan within 8 months. With where we are today financially, I'd never consider a home equity loan. Putting the house at risk for any reason won't fly anymore.

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  9. We chose the "pay it off and sleep well" route. We figured it out our $12,000 interest in a year would only net us $3,000 back from the government. No wonder banks are so pretty! Looks like this deduction will stay in both versions of the tax bill.
    Delaware has some of the lowest property taxes ($1,000 for the entire year!) and before that we lived in Arizona. And, most of all, we had saved the cash! If we ever go down to "one paycheck", I can handle the bills on SS-easily.

    Several of our friends choose to rent for their beginning (ages 60-69) retirement years. "A house is a house. A home is where you lay your hat." They have their money waiting to the side and will "pull the trigger" with cash if need be. Otherwise they are enjoying moving around.
    I was wondering about continuing care. My understanding is that the buy in is often what you stated, but they also check your financials and want a lot (as in $500,000 or more) in assets as well to make sure you never become a Medicaid resident? (Have to care for because it is illegal to throw you out for non payment). Are you finding something different? I sure would love that industry to be opened up!
    Great post Bob. Thought provoking.

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    1. You raise an issue about financial assets for CCCs that I have not heard of before. From their perspective that makes sense but I'd have to do some research to verify the ins and outs.

      As you know property taxes in Arizona are low though it sounds like Delaware has us beat. We had considered renting instead of buying for our last move, but just weren't comfortable being unable to really decorate and modify to fit us. Plus, we are both sensitive to noise, so having people living above, below, or beside us wouldn't work.

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  10. I'm still deciding what to do about my mortgage. I could use savings to pay it off in a few years, but I'm not sure I want to stay in this house. Alternatively, as I age I could automate my mortgage payments and not worry about taxes or insurance and being foreclosed on.
    At this writing I would have the house paid off by age 70 if I stayed. The house is more than I need but I love the neighborhood as it is now. That could change. I'll be making my decision at 62 which is two more years. I think it's harder to pay off when you're not sure if you'll stay or go.

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    1. I wish you the best in your decision-making. It really is an individual, "comfort" issue as much as a money question. It is good you have set a deadline for yourself to come to a conclusion.

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  11. As I live in Canada, the specific parameters around mortgages are a bit different, but the basic logic of pay it off versus keep your money in high earning investments holds. I am a great believer in living a debt free life. I reached the state of being mortgage-free on my last two houses by making the largest possible down payment when I bought them and paying the mortgage off as rapidly as possible.

    However, when I retired, Rob and I decided to move to Vancouver Island to be closer to family. We moved from a low cost of living area to a place where real estate costs have been rapidly rising. Although I would have liked to have maintained our mortgage-free status, neither of us felt ready to move into a condo without any property, or into an older shabby house with issues, which are what we could have afforded to buy outright here with our existing equity. So we purchased a home and property that we really love, financed with a home equity line of credit at a very affordable rate.

    There are some reasons that this might be a smart financial move. 1. With our pooled retirement income, we can easily afford the mortgage (HELOC), and if either of us passed away, the other could still afford it. 2. My investments are earning double the amount we pay in interest. 3. The cost of housing in this area is appreciating rapidly, and it seems likely to continue for the foreseeable future as this area is considered a desirable place to live, thus the value of our home can be expected to appreciate. 4. The house has a suite which we could rent out for income if we needed to, or use to house an elderly parent or adult child, or in the future use to house a caregiver if needed so that we can age in place.

    So after all, we have ended up having a mortgage in retirement. Despite the points I have just made, we are paying it down as fast as we comfortably can.

    Jude

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    1. You have presented an excellent set of reasons for not paying of a mortgage right away or using cash from a previous purchase. All 4 reasons make perfect sense.

      BTW, I have been to Vancouver Island and understand why housing prices are so high...it is an absolutely stunning place.

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    2. Bob, the next time you and Betty come here, we would love to have you come and visit us.

      Jude

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