Conventional wisdom holds that retiring with debt – especially one as large and significant as a mortgage – is financially risky at best and potentially ruinous at worst.
That’s not how Brian Lindmeier sees things. “It doesn’t make sense to pay off the house,” he said.
Mr. Lindmeier, 80, a retired purchasing and inventory manager, and his wife, Cindy, who retired from the local public school system, refinanced their home in Orange, Calif., in late 2020. They transferred their balance in a new 30-year loan and cut its interest rate in half to less than 3 percent. Mr. Lindmeier called the decision “obvious.”
“The money I should withdraw from my savings or investments earns higher interest than the interest I pay on the loan,” he said.
For a growing number of older Americans, taking out a mortgage that can outlive them makes economic sense. A significant percentage of homeowners have fixed-rate mortgages with historically low rates. In the third quarter of last year, about six in 10 mortgage borrowers held loans with interest rates below 4 percent, according to online real estate brokerage Redfin. Nearly a quarter had rates below 3 percent.
A campaign of rate hikes by the Federal Reserve, intended to curb inflation, has boosted the yields investors can get on ultra-secure instruments like certificates of deposit to 5% or more.
Even those who spent years saving with the intention of paying off their mortgage with a lump sum in retirement now find themselves recalculating. Some feel these funds would be better deployed by earning returns on other investments or helping them meet their cash flow needs for everyday expenses.
Eric Zittel, chief lending officer at Financial Partners Credit Union in Downey, Calif., said a number of his members, including Mr. Lindmeier, were holding on to their mortgages and their money.
“They realize they can get a rate of 4.5 to 5 percent just on a CD. When you do the math, it makes a lot more sense for them to keep those funds.”
A number of financial advisors and retirement planners say the imperative to pay off a mortgage before retirement is an outdated axiom in today’s economic climate.
“While paying off debt seems like a very conservative and safe decision, trading your cash flow for a paid-off mortgage is quite risky,” said Evan Beach, president of Exit 59 Advisory, a planning-focused wealth management firm. retirement income in Australia. Alexandria, Virginia. “You’re losing money in your pocket that you might actually need for something else.”
Gary Jacobs, a client of Mr. Beach and a retired federal employee, and his wife, Donna, a retired nurse, refinanced the mortgage on their home in Chevy Chase, Md., in late 2021 , while mortgage rates were at a historic high. hollow.
“Timing is everything, and we timed it perfectly this time,” Mr. Jacobs, 79, said. Refinancing into a new 30-year mortgage at about half their previous interest rate reduced the couple’s monthly payment by about $300.
“Even if we could have done it, we didn’t want to dip into our cash reserves to pay off the mortgage,” Mr. Jacobs said, adding that paying off the mortgage would have cost about half of their savings. “We are conservative in the sense that we want to prepare for eventualities where we might need money.”
This dynamic is one of the factors that is causing a historically high percentage of older Americans to carry mortgage debt into their later years, according to a new report from the Joint Center for Housing Studies at Harvard University. In 2022, researchers found that just over 40% of homeowners over 64 have a mortgage, up from about 25% a generation ago.
Extremely low mortgage rates have been a big factor in the increase, said Jennifer Molinsky, project director of the center’s Housing and Aging Society Program. “We think that for some people there is a calculated financial decision that they would prefer to keep their mortgage, even if they could pay it off, and invest it elsewhere,” she said.
But Molinsky said she is concerned that the increase is accompanied by an overall increase in the debt burden among seniors. “There is a trend among all seniors toward higher levels of debt across the board,” she said.
The downside of having a mortgage
Retirees on fixed incomes may struggle to manage higher interest and variable rate debt, such as outstanding credit card balances. In a worst-case scenario, if a health crisis or the death of a spouse destabilizes their lives or finances, older Americans could risk losing their homes.
“For a low-income senior, homeownership can sometimes become difficult because as people enter retirement, they often see a decrease in their income,” said Lori Trawinski, director of finance and investment. employment of the AARP Public Policy Institute.
Although the recent surge in real estate prices has given homeowners more equity on paper, it can pose a challenge for those on fixed incomes, as these higher valuations can lead to higher property taxes and fees. Insurance premium.
Some senior finance and policy experts point out that because the mortgage is almost always the largest component of a homeowner’s monthly expenses, homeowners in their 50s and 60s have less resilience to absorb a financial shock. such as unexpected job loss or care demands.
“Housing is the biggest part of that budget for everyone, so it’s definitely more expensive on a monthly basis to have a mortgage than to have a house paid off,” said Beth Truesdale, researcher at WE Upjohn. Employment Research Institute.
Although people may intend to keep their jobs until they are able to collect Social Security, Ms. Truesdale said, her research indicates that only about half of American workers remain employed during the fifty. This suggests that a revenue-reducing event is more common than many people think. While the decline in labor force participation is more pronounced among women and less-educated workers, the employment rate falls by about 20 percentage points across all demographic groups for people in their 50s.
“Even for people starting out with benefits, there’s no guarantee they’ll be able to work as long as they want,” Ms. Truesdale said.
For those who own their homes free and clear, the Joint Center for Housing Studies found that older Americans often struggle to tap into the equity tied up in their homes. And these homes may not be as valuable as their owners think. AARP’s Ms. Trawinski said longtime homeowners might be content to live with, for example, outdated kitchens or bathrooms.
“A lot of times people don’t make these kinds of improvements,” she said. Older homeowners may also have mobility limitations or other physical challenges that make maintaining a property more difficult.
Low-income older homeowners, who are more likely to be people of color, are also more responsible for struggling to pay for needed repairs and improvements. “There’s less opportunity to invest in that property and maintain it over time,” said Ms. Molinsky of the Center for Housing Studies. “People need to maintain the value of that asset if they want to use that capital later in life,” but, she added, maintenance can incur significant costs.
The effect that housing costs can have on the average household budget may cause some people to view a mortgage as a risky obligation to hold onto until retirement – in some cases, whether or not this concern is justified, has said David Frisch, founder of Frisch Financial Group. in Melville, New York
“In addition to the financial calculations, it’s also psychological in terms of risk,” he said, adding that even when the calculations suggest that maintaining a mortgage would cost less than paying it off, aversion Some owners’ intense interest in debt influences their choices. “Some people don’t want their mortgage payment hanging over their heads even if they earn more” by keeping that money in CDs or Treasury securities, he said.
Some financial planners also adopt a philosophy that less debt is better. Jamie Cox, managing partner of Harris Financial Group in Richmond, Virginia, said a homeowner’s psychological approach to debt plays a role in their reluctance to encourage a client to stay on a mortgage.
During the financial crisis, Mr. Cox said, his clients whose mortgages were paid off were more optimistic about their portfolios falling because they didn’t have that obligation hanging over their heads. “They are better investors because they are not afraid of losing their house,” he said.
Determine what is best for you
No one decision will work for everyone, which is why financial planners suggest retired or near-retirement homeowners consider the specifics of their mortgage terms, cost of living and risk tolerance, as well as the following points :
-
If you took advantage of historically low rates to refinance, you may get a higher return by keeping the money intended for paying off a mortgage in safe investments like CDs or Treasury bills.
-
Financial advisers warn against paying off a mortgage if it leaves you with little or no emergency savings. Advisors generally suggest keeping an emergency fund of between three and six months of living expenses in cash or similar liquid instruments.
-
Your personal risk tolerance is important. Saving a few hundred dollars a month shouldn’t come at the expense of your peace of mind.
