41 Replies Latest reply on May 11, 2013 11:38 AM by JerryD

    Mortgage at retirement

    smithsns
      Is it wise to retire at 75 with a mortgage? The mortgage would probably be 30 years.
        • Re: Mortgage at retirement
          jocee
          The old rule used to be to pay off your mortgage before retiring but many people we know are going into retirement with mortgages.  Not having one gives you a little more wiggle room if the markets go down or unexpected medical expenses occur.  We both downsized and paid off our mortgage when we relocated at retirement.  When the market crashed a year later, not having a mortgage made it easier for us to be less freaked out when we lost a lot of our savings.  We did not have to consider cashing in investments while they were down to pay a mortgage. 
           
          You should also factor in what other debts, cars, second home, student loans, you might be carrying to see if you will be comfortable with more debt.  One of the biggest lessons of the housing market crash is:  real estate is not a liquid asset or a guaranteed investment. As we have seen in the past few years, it could take years to sell a house and you may have to take a loss on a quick sale.  When we worked we moved a lot and felt anxious when our house didn't sell in a month.  Can't imagine what it is like now when people list their houses for years.   
           
           
           
           
           
            • Re: Mortgage at retirement
              JerryD
              Some good advice. We cleared all mortgages before the "official" retirement. Can't imagine worrying about a big debt that doesn't go away. But then we paid off our mortgage when I was unemployed for long periods just to make us feel more secure and to cut cash requirements.
               
              But then the originator needs to consider whether she wants to leave the house to others, what cash flow they have/need, etc. I would think that a mortgage is better than a owned house that you take a reverse mortgage out on.
               
               
            • Re: Mortgage at retirement
              plmurphy
              Retirement income is a function of cash flow, period. A mortgage is part of that equation along with other monthly expenses, plus, extracurricular activities such as travel. We just moved to a 55+ community and have a 30yr. fixed-rate mortgage with 50% down. Why tie-up funds in a poor investment like a house?
                • Re: Mortgage at retirement
                  TJN
                  That is a sensible approach. Like a lot of things, it depends. There is something to be said for not tying up a lot of cash in a house - there is also something to be said for the convenience of having the mortgage servicer take care of the taxes and insurance - and the  mortgage interest tax deduction can be useful to some.
                  • Re: Mortgage at retirement
                    Sharon
                    I dont' know where  you live, but here, a house is the BEST investment possible.  Pay $50,000 for a house and 35 years later it is worth close to 2 million dollars!  Don't know of any other investment doing that well!
                  • Re: Mortgage at retirement
                    ramiroh
                    I have been recently thinking that it does NOT make sense to pay off our house. This makes particular sense for us since we do not have children or heirs to whom we want to leave an inheritance. I asked two different financial advisors about paying off our home without telling them what I thought about it and they both said that more and more people no longer buy into the idea of "owning" your home outright! I think as long as the cash flow is sufficient to cover your costs including a mortgage payment or rent, then you should be fine. I would rather have cash in the bank than tied up in  real estate anyway given recent history!
                      • Re: Mortgage at retirement
                        mamajana
                        This is a big issue for me.  I am single and plan to retire next year.  I have about $40,000 equity in my home, have no other debt,  and I'm thinking of selling and renting.  The actual mortgage cost isn't bad and I can afford it, it's the other stuff, landscaping, unexpected repairs, upkeep, etc. that eats up your income.  A sudden financial drain like that can devistate your savings.  However, my financial guy says I need to consider the tax deduction I get on the interest and taxes.  So, I haven't decided what I'm going to do.
                          • Re: Mortgage at retirement
                            mbfeltz
                            We are also thinking of selling our house and moving into an apartment. Maintenance and upkeep in a home make it so much more expensive than a mortgage. I think the cost of a very nice apt would be the same as a mortgage without the additional maintenance expenses. Having a house also can tie you to one place and a specific monthly payment, and we are not sure just where, if any one place in particular, that we want to be for the long term. It has always been our desire to move around and get to know different places.
                        • Re: Mortgage at retirement
                          ramiroh

                          Hey mamajana, everyone has a different situation and you really need to consider all of your finances when making this decision. What works for one person may not work for another. I think you should have your financial advisor run cash flow scenarios with and without the mortgage to see how the two compare. If you don't desire to leave something to relatives or friends, then it may not make sense to have equity in a house that someone else will benefit from when you're gone. Also, a home is NOT a liquid asset and if you need to get that equity out for repairs or other things, it may be difficult to do so. I think I could make an argument for keeping the house as well as for selling it. If you trust your financial advisor, he/she should run different scenarios for you and help you make this very important decision. Tax savings can be realized through other means and if your income will be lower in retirement, then do you really need the mortgage/property tax deductions anyway? Additionally, you should be investing in a Roth IRA as well as a 401k/403b to ensure that you have a tax free source of income at retirement as well as a taxable source to mitigate your income tax liability and have that option since we don't know what tax rates will be in the future.

                            • Re: Mortgage at retirement
                              JerryD
                              Several have commented on the financial aspects of owning a home, but you should also consider the implications of alternatives. Do you like the home? Where you live? Neighbors? Like/dislike living in an apartment or condo environment? Have animals that don't fit well with multi-family choices? Etc. Etc.
                               
                              Make sure you consider all of the implicationbs.
                               
                                • Re: Mortgage at retirement
                                  ramiroh
                                  Completely agree with you Jerry. There are so many factors to consider in this decision. Lifestyle is a BIG part of the equation.
                                    • Re: Mortgage at retirement
                                      bgerry2
                                      I'm new to this thread, and am getting more and more confused.  We are selling our house and moving to another region when I retire next fall.  My partner says he wants to buy outright and have no mortgage, and I think we should have a mortgage so that we have more money on hand.  I have two children from a previous marriage to whom I would like to leave my share on both our deaths, and so I'm confused about whether it's better for them to inherit a paid-for house or a mortgaged house.  Can someone explain the reasoning on both sides in regard to heirs?  And I guess also in terms of the safety of one's investment - is owning outright not a safe idea?  Cash flow should not be a problem as we are moving to a much cheaper area.  Thanks all.
                                        • Re: Mortgage at retirement
                                          JerryD
                                          We own our home. Kids should get it mortgage-free with no payments except insurance & taxes which should also be covered by the trust. If one wants it, they can purchase it from the estate with their portion of the estate.
                                           
                                          Not saying that this maximizes the value to them, but at least there will not be any fire sales to pay for the on-going expenses. 
                                        • Re: Mortgage at retirement
                                          cyber888
                                          Bad idea.  If you have a mortgage, you will take out more from your retirement account. The result = you pay higher taxes, the bigger you take from your retirement account.   If you have no mortgage, you may be able to live on Social Security and a small withdrawal into your 403 or 401K and you can almost be tax free.  Imagine your retirement income taxed at 20% so you can withdraw to pay your mortgage.   If you have no mortgage, your retirement income tax could be near 0%.   That makes a big difference.
                                           
                                          ramiroh said...
                                          I have been recently thinking that it does NOT make sense to pay off our house. This makes particular sense for us since we do not have children or heirs to whom we want to leave an inheritance. I asked two different financial advisors about paying off our home without telling them what I thought about it and they both said that more and more people no longer buy into the idea of \"owning\" your home outright! I think as long as the cash flow is sufficient to cover your costs including a mortgage payment or rent, then you should be fine. I would rather have cash in the bank than tied up in  real estate anyway given recent history!
                                    • Re: Mortgage at retirement
                                      docloop
                                      Having a mortgage at retirement is a mixed bag. Sure you don't have a payment, but it also ties up a lot of cash. Why should my wife and I tie up all that money, just to pass it along to someone else when we die? Plus we still get a mortgage interest tax write off, but this should not be a major concern. The write off is not that much - about .20/$1.00. It should be noted that our retirement income is sufficient to allow us to have a mortgage payment and not be stressed. For others this may not work. It depends on ones personal situation. May want to get advice from someone you can trust not someone who stands to benefit from your decision. Good luck!
                                      • Re: Mortgage at retirement
                                        Rjspin
                                        We have a mortgage on our second home. When we start withdrawing from our retirements funds we will have taxes. The mortgage will provide some tax avoidance until age 70.
                                         
                                          • Re: Mortgage at retirement
                                            bsox1918
                                            Never thought about the interest expense tax advantage on keeping a mortgage on a second home.  Good point!
                                            • Re: Mortgage at retirement
                                              Ms_Carolyn
                                              Rjspin said...
                                              We have a mortgage on our second home. When we start withdrawing from our retirements funds we will have taxes. The mortgage will provide some tax avoidance until age 70.
                                               
                                              I agree about the often overlooked advantage of having a mortgage into retirement, as is my retired case right now.  I've just had to pay at tax time (for 1st time in years).  I need/like deductions rather than paying more for income taxation and gov. waste (and pay to so many that do NOT have to even file for tax).  My property tax and mortgage interest (adj) went down and thereby my usual deductions for them.  So, I've come to love my mortgage even more now.  Plus, it gets me mnay free perks (checking, check, etc.) with my bank who also holds the mortgage.  Once my mortgage goes away, I'll have pay fees for those perks.  Perhaps by them I'll go full service to my credit union.  There are always pros and cons to consider.  By the way, am LOVING retirement and receiving my TIAA disbursements!
                                              • Re: Mortgage at retirement
                                                Is there more of a tax avoidance/interest expense benefit on a second home than there is on a primary home? I was told by my accountant that I don't get enough of a tax break on the mortgage interest I pay on my primary home and therefore, I plan on paying off more of the principal each month.
                                                • Re: Mortgage at retirement
                                                  menlodoc
                                                  The problem with a mortgage on a second home is that there is no guarantee that it will continue to be tax deductible interest.  If the government ever gets around to making a decision about how to generate more tax income to pay down governmental debt, they most likely will attack the deduction for second home mortgages before attacking the tax deductibility of primary residences.  Unfortunately there is not a lot of political support for helping wealthy people who can afford a second home.
                                                  • Re: Mortgage at retirement
                                                    JerryD
                                                    Rjspin said...
                                                    We have a mortgage on our second home. When we start withdrawing from our retirements funds we will have taxes. The mortgage will provide some tax avoidance until age 70.
                                                     
                                                    Sorry, I don't understand how a 25% or even 33% or whatever refund is any advantage. That means that you pay the remaining percentage in needless interest. Or maybe you are a very good investor that can take the ~30% refund and gain enough on it to make this a good choice. I certainly am not.
                                                    • Re: Mortgage at retirement
                                                      cyber888
                                                      Rjspin said...
                                                      We have a mortgage on our second home. When we start withdrawing from our retirements funds we will have taxes. The mortgage will provide some tax avoidance until age 70.
                                                       
                                                       
                                                      Bad idea. 
                                                      See, if you are not paying for a mortgage, your retirement withdrawal will be minimal and your social security income will not be taxed.   If you are withdrawing a lot from your retirement funds, your tax bracket will go up - you will be paying more taxes, up to 85% of your SS benefits could be taxed for bigger withdrawals from your 401K.   
                                                       

                                                        • Re: Mortgage at retirement
                                                          ramiroh
                                                          I think I understand your point. Basically, the more cash you withdraw the higher your potential tax liability.
                                                           
                                                          However, I think you missed an important point of our situation. We have no heirs nor any desire to leave anything for anyone.  So what value does having $600K or more fully invested in my home? I can't access that cash unless I sell or "take out a mortgage" and eventually it will be left to my family!
                                                           
                                                          I would rather have the $600K in the bank and available for my use for wants or needs. This means I will need to pay rent somewhere and I can spend as little or as much as I want. And I will have the flexibility to easily pick up and move anywhere in the country without worrying about having to divest myself of a piece of real estate
                                                           
                                                           
                                                           
                                                            • Re: Mortgage at retirement
                                                              JerryD
                                                              ramiroh said...
                                                              ... We have no heirs nor any desire to leave anything for anyone.  So what value does having $600K or more fully invested in my home? ...
                                                               
                                                              I would rather have the $600K in the bank and available for my use for wants or needs. This means I will need to pay rent somewhere and I can spend as little or as much as I want. And I will have the flexibility to easily pick up and move anywhere in the country without worrying about having to divest myself of a piece of real estate
                                                               
                                                               
                                                               
                                                              I think that your thinking is right on. If renting is compatible with your disposition and lifestyle and you have no estate goals, using the money tied up in your house seems like a very smart thing to do in my opinion.
                                                                • Re: Mortgage at retirement
                                                                  cyber888
                                                                  i agree with Jerry.   It's like you are paying $10,000 in interest to the bank, in order to avoid paying $2000 in taxes to the government. 
                                                                   
                                                                  JerryD said...
                                                                  Rjspin said...
                                                                  We have a mortgage on our second home. When we start withdrawing from our retirements funds we will have taxes. The mortgage will provide some tax avoidance until age 70.
                                                                   
                                                                  Sorry, I don\'t understand how a 25% or even 33% or whatever refund is any advantage. That means that you pay the remaining percentage in needless interest. Or maybe you are a very good investor that can take the ~30% refund and gain enough on it to make this a good choice. I certainly am not.
                                                                • Re: Mortgage at retirement
                                                                  cyber888
                                                                  Well, if you don't want to be stuck in your home, then yes - sell it and rent.   If you plan to say in your home, then why not get a reverse mortgage, then you don't have to pay rent. 
                                                                   
                                                                  ramiroh said...
                                                                  I think I understand your point. Basically, the more cash you withdraw the higher your potential tax liability.
                                                                   
                                                                  However, I think you missed an important point of our situation. We have no heirs nor any desire to leave anything for anyone.  So what value does having $600K or more fully invested in my home? I can\'t access that cash unless I sell or \"take out a mortgage\" and eventually it will be left to my family!
                                                                   
                                                                  I would rather have the $600K in the bank and available for my use for wants or needs. This means I will need to pay rent somewhere and I can spend as little or as much as I want. And I will have the flexibility to easily pick up and move anywhere in the country without worrying about having to divest myself of a piece of real estate
                                                                   
                                                                   
                                                                   
                                                                    • Re: Mortgage at retirement
                                                                      JerryD
                                                                      I have said several times that my opinion of reverse mortgages is that they are only for those with few other options. In my thinking they are like legal theft from old people. I can't believe that all of those famous people that advertise them can in good conscience be in those ads.
                                                                      • Re: Mortgage at retirement
                                                                        smaneck
                                                                        Reverse mortgages are mostly for those who have no other assets other than their house in which they wish to continue living. The terms are not good but sometimes a better option than forcing aged people who have lived in the house they love their entire lives to move. 
                                                                         Someone close to me was forced to retire early due to a disability. He between his IRA, is 401K and his savings he had less than 60K. I persuaded him to move to Mississippi where he was able to buy a 3 bedroom 2 bath house for less than 28K (yes, that is possible here right now.) Now that he has no rent to pay he can live modestly on his Social Security income. Once the housing market recovers I expect his house will be worth about 80K. If needs money later on he can take out a reverse mortgage. 
                                                                          • Re: Mortgage at retirement
                                                                            cyber888
                                                                            Wow. Where in Mississipi can you buy a $28K house?
                                                                              • Re: Mortgage at retirement
                                                                                smaneck
                                                                                cyber888 said...
                                                                                Wow. Where in Mississipi can you buy a $28K house?
                                                                                Jackson, but of course these houses are not in the best neighborhoods. It is even possible to buy houses cheaper than that. My mother and I bought I four bedroom 2 bath house for about 15K but it had been vandalized, every wire and copper pipe in the house had been stolen. It cost us about 30K to fix it up but now it is rented for $850 a month, not a bad return on our investment. My mother then used a self-directed IRA to buy a second house again for 15K. This time it only took 2 or 3K to fix it up and it rented for $700 a month. That house was three bedroom, 2 baths but not in neighborhood I would live (and I'm not picky.) My son later bought a three bedroom one bath house in a better neighborhood for 23K. 
                                                                                So if you are looking for a cheap place to retire, go south old man.  
                                                                                 
                                                                          • Re: Mortgage at retirement
                                                                            jckcomm
                                                                            Absolutely...your thought is correct...leave the mortgage, and have the cash on hand
                                                                          • Re: Mortgage at retirement
                                                                            smaneck
                                                                            I think the rule of thumb is you pay off your home if you intend to live in it throughout your retirement. Otherwise, no. 
                                                                          • Re: Mortgage at retirement
                                                                            Sharon
                                                                            Why is age 70 providing tax avoidance? What about the years when you are 80 or 90?
                                                                          • Re: Mortgage at retirement
                                                                            DMStark
                                                                            Interesting perspective from fellow retirees --- wonder where is the advice from TIAA-CREF experts??? 
                                                                             
                                                                            One perspective - that i did not see noted - interest rates may be a factor to consider - I currently pay 4.4% on a 30 yr loan but can refinance at 2.8% on a 15 year loan ---  figure the savings for me in the six figure range. 
                                                                             
                                                                            If I had the loan $$$ to invest what kind of return would I be getting in today's financial market??? Compare that with everything others are saying.....
                                                                              • Re: Mortgage at retirement
                                                                                smaneck
                                                                                I don't think TIAA-CREF experts post here. It is just us folks. But naturally they would rather us invest the money in a guaranteed annuity.Insert thewinkingemoticon.
                                                                                I would love to refinance my house which is at 4.5% but I'm thinking it might be underwater and therefore not eligible. I would pay some of it off in order to make it eligible but the amount owed would be less than than most mortgage companies are willing to finance. I owe about 78K on a four bedroom, two bath house that zillow says is only worth about 64K.
                                                                                Yeah, I know, where can you get a four bedroom house for 64K?
                                                                                 Mississippi.  And no, rents are not particularly low. I could rent my house for a about $950 a month.
                                                                                  • Re: Mortgage at retirement
                                                                                    JerryD
                                                                                    I know a place where you can buy houses cheap like this. Pretty good neighborhoods. Not sure you can get rents like that. Also, you probably wouldn't like the over 300" of snow that they have received so far this winter and it is still snowing.  :-))))
                                                                                • Re: Mortgage at retirement
                                                                                  Wilfred
                                                                                  We have recently retired with no mortgage on our primary house and 105K (year 10 of 30 on a 7/1 loan which now changes every year based on the LIBOR) on our second home/condo which will soon become our primary home when we sell. For the last two years, we have not been able to itemize.   If we were to pay down the mortgage by 6K to get a balance under 100K, would that be helpful for our credit reports not to have a mortgage that tops 100K?
                                                                                    • Re: Mortgage at retirement
                                                                                      smaneck
                                                                                      Wilfred said...
                                                                                      "We have recently retired with no mortgage on our primary house and 105K (year 10 of 30 on a 7/1 loan which now changes every year based on the LIBOR) on our second home/condo which will soon become our primary home when we sell. For the last two years, we have not been able to itemize.   If we were to pay down the mortgage by 6K to get a balance under 100K, would that be helpful for our credit reports not to have a mortgage that tops 100K?"
                                                                                       
                                                                                      That's not how credit works. Your credit worthiness is measured not by how much you owe, but by your repayment record, you credit ratio, and how much credit you have available compared to what you are using.  In other words, you get a good credit rating when you pay your debts on time (not necessarily early.) In regards to credit availability, you want to have at least three times as much credit available as you are using. To this end paying off your credit cards helps, but if you close your credit a card accounts, your credit score takes a hit. Paying down a mortgage doesn't help because unless your mortgage is a HELOC, that credit is no longer available to you when you pay it off. Your credit ratio is not part of your credit score per se, but it is critical in determining your eligibility for a home mortgage. Creditors do not want to see your loan payments, including the mortgage you might be apply for, taking up more than 40% of your income. 
                                                                                      • Re: Mortgage at retirement
                                                                                        JerryD
                                                                                        Wilfred said...
                                                                                        ... For the last two years, we have not been able to itemize ...
                                                                                        You don't say it exactly, but should you be left with unused standard deductions and personal exemptions on you Federal income tax, you should look very closely at using these "free" deductions to cover conversions from an IRA to a Roth with absolutely no tax-consequences.