Some people try to maximize the benefits of the strategy by taking out a variable rate loan, because it carries the lowest interest rate at the start. Using your retirement savings to make mortgage payments could also trigger taxes. An award letter from the SSA or a current receipt of issuance can be used as proof. Today, 39% of those over 65 have mortgages compared to 28% who had the loans 16 years ago. That takes away the 3% worry. So a lot of near retirees are finding themselves with 10-20 years left on their mortgages when they want to retire. You don’t have to worry about maintenance or taxes. Home equity should be a working asset, not something that is stored away, they say. You have just signed a 30-year mortgage of $250,000 at 5% interest, and your scheduled payment is $1,342 per month. If you’re younger than 59.5 years, you will incur a 10% e… should be predictable, stable, and likely to continue. This example assumes Max takes just one mortgage. W-2s and paystubs are offered as proof of income history, though there is no additional burden of proof that income levels are expected to remain consistent for the lifetime of the loan. This is a guaranteed return. Practically, I can appreciate that doesn’t always happen due to a variety of factors. According a new reportfrom the Center for Retirement Research, in 2007 41% of households aged 60-69 had a mortgage. Each lender will have specific criteria that must be met, making it important to do your research before assuming you will qualify for a loan. Baby Boomers are becoming the largest demographic and their needs are increasing. Many retirees and seniors are opting to have a mortgage instead of paying off their loan balance or buying a new home with cash. A long-term perspective is required. In one significant way, retirement is materially different than it used to be: far more retirees are still trying to pay off their houses. After 20 years, the combination of mortgage payments and appreciation might give Max enough equity that he can refinance the mortgage so that he now has a $200,000 loan. Instead of having equity tied up in the home, put it to work so that over time it pays for the house’s holding costs. To pay off your mortgage early via refinancing, you'll need to switch to a shorter-term loan. The answer is that it depends. “If you have a $1,500-per-month mortgage today at the beginning of a 30-year retirement, your payment will still be $1,500 at the end,” he says. Today, 39% of those over 65 have mortgages compared to 28% who had the loans 16 years ago. Max uses that amount to pay off the first mortgage, adds $140,000 to the investment portfolio, and begins making payments on the $200,000 portfolio. Those who are still working tend to easily meet this requirement. But the debt must be used wisely. And the non-financial aspects must be given as much consideration as the numbers. Yet, investments with a higher after-tax yield than the mortgage are tough to find, and they carry a fair amount of risk, perhaps more risk than a diversified portfolio of growth investments. Retirees should pay off their mortgage loan before retirement. A devastating new law has just been enacted, with serious consequences for anyone holding an IRA, pension, or 401(k). More than likely, a portfolio that earns 8% annualized over the long term is likely to have many years with returns that are either higher or lower than 8% by wide margins. In much the same way you should aim to debt-free by retirement, retirement is also a good time to evaluate the ways in which you can pay off any existing debts. With retirees, lenders must look at a combination of income sources and the limits or expected ending of these sources. If you are nearing retirement and have been renting most of your life, running out and buying a new home will likely not make financial sense. You would have paid interest the last five years and only now would be getting the investment balance back to its starting level. Stocks, real estate, and commodities are the most likely choices for the portfolio. That puts Max ahead from the start. An investment that historically earns more than the mortgage interest rate will be volatile. The big mortgage strategy is not for everyone. While having a mortgage during retirement adds a hefty bill to a post-employment lifestyle, allocating more money to paying off your mortgage before retirement to the detriment of your ability to save for retirement is generally not the answer. In retirement, home equity always can be tapped when needed through either a home equity loan or a reverse mortgage. If Max keeps the strategy in place for 30 years, he pays $100,000 in principal and $115,838 in interest on the mortgage. Fortunately, there are still steps you can take to sidestep Congress, starting with this ONE SIMPLE MOVE. The investment portfolio isn’t guaranteed to always be worth as much as the loan balance, especially after taxes on the appreciation are considered. Adding a mortgage payment to your monthly expenses could deplete your funds even faster, leaving you struggling to make ends meet. The investment portfolio purchased with the loan proceeds will generate income and gains to offset the mortgage and the cost of home ownership. The counterargument is that in times of severe financial distress, the investment portfolio can be liquidated and the proceeds used to pay the mortgage and any other expenses that arise. Whether out of necessity or in order to save, it is possible for someone who is retired to quality for a mortgage. Think about this scenario. In other circumstances, it carries a lot of risk. In fact, you probably would have paid a few taxes on dividends from the portfolio that would further reduce the fund. There are a few things that make me jittery here. The equity sits there while you spend money to maintain it. You have just signed a 30-year mortgage of $250,000 at 5% interest, and your scheduled payment is $1,342 per month. This strategy is not for someone who would lose sleep during periods when things are not going as planned. Another study from the Center for Retirement Research at Boston College found that Americans over age 60 were 24% more likely to have mortgage debt in 2015 than in they were in 1980. Those who are still working tend to easily meet this requirement. Not having to worry about a mortgage payment has an emotional benefit that increases satisfaction in retirement. If Max is able to pay $600 monthly for a mortgage, that means he has enough cash flow to skip the mortgage and put $600 monthly into an investment portfolio. Fannie Mae lets lenders use a borrower’s retirement assets in one of two ways to help them qualify for a mortgage. The primary advantage of paying off a mortgage prior to retirement is you'll have less debt -- and more disposable income -- as a senior. The original mortgage balance is down to about $60,000. More retirees rely on Social Security benefits, 401(k) payouts, pensions, or other savings funds. Some financial planners recommend maintaining the largest and longest mortgage possible throughout your life. Mortgage … Some advisors recommend using the loan proceeds to purchase income-producing investments with higher yields than the mortgage rate. Withdrawing funds early from your retirement savings accounts can be costly. This strategy is available for homebuyers 62 and older through the Home Equity Conversion Mortgage for Purchase program backed by the federal Department of Housing and Urban Development, which insures the lender against loss should the home's eventual sales proceeds fall short of the debt. His investment fund grows to over $1,000,000. A new federal report says one-third of retirees now have a mortgage. An adjustable rate mortgage might be a good idea if you plan to live in the home for less than five years and have a comfortable gap between current income and the mortgage payments. Borrow against your home equity, and use the loan proceeds to buy a diversified portfolio of growth investments. States with lower home prices have a greater number of homes that are free of a mortgage. Let’s consider the possible arguments. To cover mortgage payments, retirees frequently have to withdraw more from their retirement funds than they would if the mortgage were paid off. More Retirees Today Have a Mortgage. Kevin Gardner is a freelance writer and expert in health, wellness, and fitness. The homeowner must resist the urge to spend all or part of the mortgage proceeds instead of investing it. This is ideal, as a hefty monthly mortgage payment can take a sizable chunk out of a fixed income. Many home buyers who in the past would have deducted mortgage interest on a new home will be better off taking the standard deduction. doesn’t have an expiration date, but there is still a three-year payable expectation date that must be documented. If you can lease it at a good price, you may be able to use this income to pay for the mortgage of the house and leave you with some extra money to spare. "The second method would be to make one half of your monthly mortgage payment every two weeks. An MLC report, "The Roof over Retirees’ Heads", notes that the proportion of homeowners who still have a mortgage at the point of retirement in 2016 surged 23 per cent in a decade to 36 per cent. If you financed — or refinanced — in the past five years or so, you have a low mortgage rate. They will inherit the investment portfolio after paying the outstanding mortgage. Why Retirees May Have a Mortgage. But big numbers of Baby Boomers are now entering retirement with a mortgage. There are different elements of proving proof of income, but so long as borrowers can demonstrate or provide sufficient evidence of their creditworthiness and to the bank’s satisfaction, retirees can qualify for a mortgage. Regardless of the reason for a retiree to still hold a mortgage, the question arises whether or not it is possible to even qualify for a mortgage after retirement. When home equity is put to work, net worth increases. But the mortgage payments still would have to be paid. Atkins warns that hanging on to an older home can be hard on a retiree’s budget. If you’re among them, it’s a good idea to understand what the pros and cons are, and to consider your options. You will need to have insurance, but only to cover your personal liability as well as your personal belongings. Some lenders allow borrowers to use retirement assets in order to aid in qualifying for a mortgage. An MLC report, "The Roof over Retirees’ Heads", notes that the proportion of homeowners who still have a mortgage at the point of retirement in 2016 surged 23 per cent in a decade to 36 per cent. 122 C St NW, Suite 515, Washington DC 20001. The data show that retiree debt isn’t as widespread as the headlines would have one believe, but the number of retirees with outstanding mortgages is growing. Paying off your home mortgage before you retire is a major financial achievement, but you don't necessarily have to eliminate all housing debt in order to retire well. Advocates of always having a mortgage point out that a home is a consumer item with high holding costs: taxes, insurance, and upkeep. His advice has helped tens of thousands of people for more than a decade. Not long ago a key part of every retirement plan was paying off the mortgage. Those assumptions and conditions are reasons why carrying a large mortgage through retirement is not for everyone. Your return on investment in a mortgage pay-off is the interest rate on your mortgage. In reality, lenders have two methods described below that they can use to calculate income for a retiree who is drawing on their assets. The landlord should handle all maintenance and upkeep. He invests the loan proceeds in a portfolio that he expects to earn 8% annually. More than 40% of homeowners 65 and older had mortgage debt on their primary residences in 2016, up from 22% in 1995, according to a recent Wall Street Journal article. Anecdotes in the media indicate that more retirees are using debt to buy larger or more expensive homes or are tapping home equity to travel and buy things. “If you’re 60, have a mortgage, and are worried about cash flow, the focus should be on reducing the size of your payment,” says Reyes. Retirees assume that if they don’t have a paycheck, they won’t qualify for a mortgage due to lack of income. This way, the money grows for the larger purpose of retirement while their fixed income is able to keep up with the current mortgage demands. The mortgage generally should be fixed rate. ARTICLE: 6 Steps To […] In a perfect world, homeowners would have their mortgage paid off long before they hit retirement age. Some experts say that by age 40 you should have at least three times your salary saved for retirement. As … A mortgage decreases flexibility. Borrowers also need to have their income documented that there is a three-year expectation of payout. So, it appears that at least half of future retirees plan to have no mortgage in retirement. Historically, when people turned 65, the majority of them would have been mortgage debt-free. In one significant way, retirement is materially different than it used to be: far more retirees are still trying to pay off their houses. However, some may find it more beneficial to sell their home and purchase another of lesser value but use the liquidity from the first home to make a larger retirement investment. Distribution must be able to remain for at least three years from the date the mortgage is issued, but it must also be documented that the borrower is able to draw on these accounts without penalty and without restriction. Should You Pay Off Your Mortgage Before Retirement? If this is your personal residence and you do itemize—by the way, only 27% of Americans who file taxes itemize—you can write off the interest portion of your payment on your personal residence. The Equal Credit Opportunity Act requires lenders to be impartial when determining lending approval, forbidding discrimination based on age. When he isn’t writing he can usually be found reading a good book or hitting the gym. Diversification can reduce the fluctuations but does not guarantee positive returns every year. But if there is a financial emergency in retirement when a large mortgage is carried, a reverse mortgage is not an option. Holding a home mortgage has tax benefits, but they may dry up in retirement. Of course, your heirs will not inherit the home. 4 Before going from a 15-year mortgage to a 30-year mortgage, make sure your savings, Social Security payments, and other forms of income will be able to keep up with those payments well into your retirement years. Is a mortgage-free retirement for you, or should you leverage home equity to enhance the standard of living of your retirement years? © Eagle Products, LLC – a division of Caron Broadcasting, Inc. All rights reserved. Some pre-retirees and retirees might be wondering if it makes any sense to pay off the mortgage on their home in the current low-interest environment. They also should consider what their expected rate of return on their money would be if they don't use it to repay their mortgage. 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