by Bob Lowry
Last week I wrote about high school reunions, even though I have never been to one. Now I’m writing about retirement and a mortgage, even though I don’t have one. Either I love showing off my ignorance or I am fearless. Maybe it is a combination of both. After all, a satisfying retirement is sometimes a walk on the wild side.
Even so the subject is important. 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. But, with home equity lines of credit at extremely low interest rates at the moment, smart use can save you 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 or 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. Though expensive and sometimes risky, reverse mortgages can provide a steady income from the equity you have in your residence too.
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 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 a low mortgage rate can you earn more in investments/ Then, use your cash to grow your nest egg. Depending on your investment strategy and resources, it is not too hard to get a rather safe return of 5% on your money. With a mortgage of under 4% are you willing to throw away that 1% of growth year and year?
Another consideration lies in what your plans are when you decide to move. For example, Betty and I plan on moving from our current home in four or five years. Housing prices have been rising in Phoenix for 15 months in a row so the future is looking brighter.
We know that at some point we 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 maybe too late.
So, we are giving serious thought to renting an apartment/town home when we move from our present home. The bulk of our profits from our current home will be invested for safe growth. While the yearly rent is lost in terms of equity or tax benefits, we will have liquidity when we are ready to move to the continuing care community.
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!). I hope readers like Sydney Lagier see this post and respond. I consider her a qualified expert and would welcome her thoughts.
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.