Housing market projections and HECM market impacts

It used to be that financial advisors would encourage their clients to pay off their mortgage before retirement. Ah, the day when Mr. & Mrs. Smith can burn their mortgage note. However, fewer older Americans are able to pay off their home before retiring. Consequently, more advisors are suggesting that one should carry a mortgage into and throughout retirement.

“You can’t eat your home”, is a phrase that points to the fact that one’s home equity is useless until one extracts it. For one to extract their equity requires either that they borrow against their home or sell it outright. In other words, their equity is tied up in the bricks and mortar of the home. However, that equity is not necessarily safe. A painful lesson learned by homeowners during the great housing crash of 2008.

So what are the advantages of having a mortgage in your retirement years?

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One obvious advantage that’s typically touted is the tax deduction of mortgage interest paid. However, the Trump-era tax reform act boosted standard deductions. In 20201 married couples filing jointly have a $25,100 deduction. Single individuals can automatically deduct $12,550. Your average middle-class homeowner is unlikely to have itemized deductions including mortgage interest that exceed the standard deduction seen today. For most, carrying a mortgage into retirement for supposed tax savings is not practical nor realistic.

According to experts, another advantage is you have a hedge against inflation. Homeowners with a mortgage stand to win with today’s average 30-year fixed mortgage rate at 3.52% and inflation surging to 7% or higher. And speaking of inflation, home values have inflated or risen by nearly 20% just last year. That’s a 17% spread between the cost of financing the asset and its gain in value. However, not the be overlooked in this equation is the actual aggregate cost paid over the life of the loan. The mortgage interest paid typically nearly equals or exceeds the principal amount borrowed.

What are the disadvantages of having a mortgage in retirement?

One is the anxiety of having a large debt that must be paid each month. Those looking to avoid this pay off their mortgage for peace of mind. However, in paying off the home they have now tied up all their equity into an illiquid asset. Even worse, some liquidate their retirement account in part or whole to pay off their mortgage.

Another disadvantage is less cash flow.

Keeping a traditional mortgage during one’s retirement years may not be the best choice unless the homeowner can make monthly mortgage payments without sacrificing their standard of living, If the mortgage becomes a burden homeowners should ask themselves what’s their end-game? Are they pinching pennies today to pay down a mortgage in the hopes of passing it one debt-free to their heirs? If inheritance is not a concern, then why are they continuing to sink money into a home that will remain after they pass on? Then there’s the uncertainty of being able to tap into their home’s value in the future. If interest rates rise a home equity line of credit or cash-out refinance may not be possible. 

One option many homeowners overlook is to take a reverse mortgage.

While the retiree is certainly carrying a mortgage into retirement, it’s a loan that allows them to pay each month, pay less when money’s tight, or simply not pay at all. Either way, they have eliminated the burden or required payments, or secured a future source of funds should they need it.

When it comes to carrying a mortgage into retirement there are four choices. Sell the home, keep the mortgage, pay it off, or transform it into a loan that doesn’t require monthly principal and interest payments. What do your typical discussions on the pros and cons of having a mortgage in retirement sound like? Let us know in the comment section below.

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