Retirement and Mortgages

Convention wisdom has always held that its best to enter into retirement without any outstanding debt, especially not a mortgage. That wisdom has been turned on its head as a result of the financial crisis, which devastated the savings of those approaching, or already in retirement. “Now, many people retire while still paying that monthly home-loan bill,” reports one source.

Despite the crisis, however, it turns out that common sense still applies: “It’s better to pay down your mortgage than to carry it into retirement. Or at least it is if you have the money set aside in a taxable or tax-deferred account.” This true for a couple of reasons. First, the return that you can expect to earn on your (retirement) savings is probably well below your mortgage rate, which implies that you are actually losing money by not repaying your mortgage. As a general rule of thumb, it’s always better to pay down your debt, so that you know exactly where you stand in your personal financial situation.

If you can’t afford to repay your mortgage before retiring, there is another option: a reverse mortgage. While there are several variations, reverse mortgages essentially enable you to draw-down the equity in your house, eventually freezing it at a certain level. Unlike with a conventional mortgage, however, there is virtually no risk of foreclosure. “Reverse mortgages have traditionally been chosen by older Americans who can’t cover everyday living expenses or who otherwise need cash for such things as long-term care premiums, home healthcare services or home improvements.”

Of course, there are drawbacks. Namely, the costs can be significant and the mortgages are often deliberately complicated. “Borrowers should consider discussing the appropriateness of a reverse mortgage given their current financial situation and the other options available to them before applying for a reverse mortgage.” There is also the risk that receiving payments in connection with a reverse mortgage could render you ineligible for certain federal retirement programs.

But the benefits are just as manifold: “You can take your payment as a lump sum, a monthly cash payout, a line of credit held in reserve or a combination of all three. No repayment is due until the last homeowner moves out or dies, at which point the home can be sold to pay off the debt. The loan repayment can never exceed the home’s market value (even if it declines), absolving your heirs of any liability.” Portability means that you can take your reverse mortgage with you if you decide to move. Most importantly, you can use it to pay off your current mortgage, and move into retirement debt-free!