Conventional wisdom holds that retiring with debt — especially debt as large and significant as a mortgage — is financially precarious at best and potentially ruinous at worst.
Brian Lindmeier sees it differently. “It just doesn’t make any sense at all to pay off the house,” he said.
Mr. Lindmeier, 80, a retired purchasing and warehouse manager, and his wife, Cindy, who is retired from the local public school system, refinanced their home in Orange, Calif., in late 2020. They purchased a new 30-year loan and cut it in half their interest rate to less than 3 percent. Mr Lindmeier described the step as “child’s play”.
“The money that I would have to take out of my savings or out of my investments will earn higher interest than the interest I pay on the loan,” he said.
For a growing number of older Americans, it makes economic sense to take out a mortgage that is expected to last their lifetime. A significant percentage of homeowners have fixed-rate mortgages with historically low interest rates. About six in 10 mortgage borrowers held loans with interest rates below 4 percent in the third quarter of last year, according to online real estate brokerage Redfin. Almost a quarter had rates of less than 3 percent.
A Federal Reserve rate-hiking campaign aimed at curbing inflation has pushed up the returns investors can earn on ultra-safe instruments like certificates of deposit to 5 percent or more.
Even those who have saved for years to pay off their mortgages with a capital sum when they retire now have to recalculate. Some conclude that these funds could be put to better use generating income from 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 some of his members, including Mr. Lindmeier, are keeping their mortgages — and their cash.
“They realize they can get an interest rate of 4.5 to 5 percent on a CD alone. 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number of financial advisors and retirement planners argue that the need to pay off a mortgage before retirement is an outdated axiom in the current economic climate.
“While paying off a debt feels like a very conservative and safe move, trading your liquidity for a paid-off mortgage is quite risky,” said Evan Beach, president of Exit 59 Advisory, a wealth management firm focused on retirement planning in Alexandria, Virginia. “You’re giving up 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, Maryland, in late 2021 when mortgage rates were at a historic trough.
“Timing is everything, and this time we timed it just right,” said Mr. Jacobs, 79. Refinancing into a new 30-year mortgage at an interest rate about half the previous rate reduced the couple’s monthly payment around $300.
“Although we could have done it, we had no desire 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 be prepared for eventualities where we might need the money.”
This dynamic is one of the factors driving a historically high percentage of older Americans to carry mortgage debt into old age, according to a new report from Harvard University’s Joint Center for Housing Studies. In 2022, researchers found that just over 40 percent of homeowners older than 64 had a mortgage, up from about 25 percent a generation ago.
Extremely low mortgage rates were a key driver of the increase, said Jennifer Molinsky, project manager of the center’s housing and aging communities program. “We believe there is a calculated financial decision for some people that they would rather keep their mortgage even if they could pay it off and invest elsewhere,” she said.
However, Ms. Molinsky expressed concern that the increase comes with an overall rising debt burden among seniors. “There is a trend for all older adults to have higher levels of debt overall,” she said.
The disadvantage of a mortgage
Retirees on fixed incomes may have difficulty managing higher-interest and variable-rate debts, 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 be at risk of losing their homes.
“Owning a home can sometimes be challenging for lower-income seniors because as people retire, they often see a decline in income,” said Lori Trawinski, director of finance and employment at the AARP Public Policy Institute.
While the recent rise in home prices has given homeowners more equity on paper, this can be challenging for fixed income investors as these higher valuations can lead to higher property taxes and insurance premiums.
Some senior finance and policy experts point out that because a mortgage almost always accounts for the largest portion of a homeowner’s monthly expenses, homeowners in their 50s and 60s are less resilient to absorb financial impacts such as an unexpected job loss or care needs .
“Housing is the largest part of everyone’s budget, so on a monthly basis it is undoubtedly more expensive to take out a mortgage than to have a paid-off home,” said Beth Truesdale, a research associate at the WE Upjohn Institute for Employment Research.
While people may intend to stay employed until they can collect Social Security benefits, her research suggests that only about half of American workers stay employed until age 50, Ms. Truesdale said. This suggests that an income-reducing event is more common than many people expect. While the decline in labor force participation is more pronounced among women and workers with less education, the employment rate falls by about 20 percentage points across all population groups for people in their 50s.
“Even for people who start with the benefits, there is no guarantee that they will be able to work as long as they want,” Ms. Truesdale said.
The Joint Center for Housing Studies has found that older Americans often have difficulty using the equity locked in their homes when they own their homes freely and for free. And these homes may not be as valuable as their owners think. AARP’s Ms. Trawinski said long-time homeowners may be content with outdated kitchens or bathrooms, for example.
“It often happens that people don’t do these types of upgrades,” she said. Older homeowners may also have mobility limitations or other physical challenges that make maintaining and maintaining a property more difficult.
Older, lower-income homeowners, who are more likely to be people of color, also have more difficulty financing necessary repairs and upgrades. “There are fewer opportunities to invest in this 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 equity later in life,” she added, but maintenance can incur significant costs.
The impact that housing costs can have on the average household budget may lead some people to view a mortgage as a risky commitment to carry into retirement – in some cases, whether that concern is justified or not, said David Frisch, founder of Frisch Financial Group in Melville, NY
“In addition to the financial calculations, it’s also psychological in terms of risk,” he said, adding that even if the math suggests maintaining a mortgage would cost less than paying it off, some homeowners’ strong aversion to debt influences their decisions. “Some people don’t want the mortgage payment to run over their heads even though they’re making more” by keeping the money in CDs or Treasury bonds, he said.
Some financial planners also adopt the “less debt is better” philosophy. 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 stick with a mortgage.
During the financial crisis, Mr. Cox said his clients with paid-off mortgages were more optimistic about the decline in their portfolios because that obligation wasn’t hanging over them. “They are better investors because they are not afraid of losing their home,” he said.
Find out what is best for you
No single decision will work for everyone, so financial planners suggest that homeowners nearing retirement consider the specifics of their mortgage terms, cost of living, and risk tolerance, as well as the following:
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If you take advantage of historically low interest rates to refinance, you may be able to get a higher return by setting aside mortgage repayment money in safe investments like CDs or Treasury bonds.
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Financial advisors warn against paying off a mortgage if it leaves little or no savings for an emergency. Advisors typically suggest creating an emergency fund equal to three to six months’ worth of living expenses in cash or similarly liquid instruments.
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Your personal risk tolerance is important. Saving a few hundred dollars a month shouldn’t come at the expense of your security.
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2024-02-18 01:25:23
www.nytimes.com
