My husband and I have been retired for more than 10 years. We’ve lived in our 4000 sq. ft., 6-bedroom home for almost 31 years. We feel fortunate that we haven’t had a mortgage payment for 20 years. However, we continue to receive lots of unsolicited advice about whether to keep the equity in our home, to downsize and invest the difference, or even to take out a home equity loan at the now historically low interest rates and invest in the Stock Market or real estate, where our gains might exceed our expenses.
The increase in value of our home over the past 30 years and the plunge in the Market since the advent of the Corona Virus make us feel happy, at least for now, that more than half of our retirement assets are in our home. However, our desire to stay put and be debt-free may not be the best strategy for everyone, or even for us going forward. We are living comfortably on Social Security, pensions and the required minimum distributions from our 401Ks. When age or other circumstances make a safer and more easily maintainable home seem like a good idea, the best choice might be to move to a smaller home. Or we may need sell the house and use the profits to pay for needed healthcare services or life in an assisted living facility. It feels good to have several options.
Mortgage-Free One of the Keys to a Comfortable Retirement
Owning a home is typically thought of as one of the keys to a comfortable retirement and financial stability in the future. But what about in these unsettling times? Is owning a home still a necessary part of a good retirement plan? A majority of pre-retirees expect to carry mortgage debt into retirement. If you’re among them, it’s a good idea to understand what the pros and cons are, and to consider your options.
If you would like to keep your home when you retire, are close to paying off your mortgage and won’t have to liquidate other investments to do it, it may be a good choice to stay put. You’ll get a drop in monthly expenses with the end of mortgage payments. If you can afford to pay taxes, insurance and all the upkeep that goes with owning a home, living mortgage-free can be less stressful. However, you might be missing out on the opportunity to put the equity in your home to use at a low interest rate.
A recent study from the Urban Institute looked at the home equity patterns of older Americans and found that homes still rank among their most valuable assets. “Not only does a house meet the basic needs of shelter, but it’s an asset that typically can be used to build wealth as homeowners pay down their mortgages,” the authors say. However, the report also warns that taking on more mortgage debt and financing it for longer periods is a trend that might make future generations less able to rely on home equity as a source of retirement income.
The Pros of Having a Mortgage in Retirement
Having a little debt may not be as risky as we have been led to believe. If you have the resources to rethink your mortgage-free retirement strategy, you have the potential for significant gains.
Investments: Using home equity to invest in rental property or other real estate assets can make a lot of sense for some retired home owners. Low rates mean they won’t be spending too much of their nest egg toward an extra mortgage payment, and they could benefit from a steady stream of rental income or the likely growth in value of other property. However, one has to be up to the responsibilities and uncertainties of being a landlord.
“I am a fan of living without debt,” said Ted Halpern, a Washington-area financial planner. “However, we’re looking at interest rates that are unbelievably low. I can understand why someone would want to borrow at those rates and invest that money elsewhere.”
Tax Benefits: State and local real estate taxes and the interest on your loan are deductible, if you meet other conditions. You need to be aware of how the 2018 tax law has affected those deductions. Now, state and local taxes (including property taxes) are limited to no more than a total deduction or combined limit of $10,000 on a federal return. The interest on new mortgages of up to $750,000 can be deducted, depending on your tax bracket. Interest on home equity loans is deductible only if the loan is used for the purpose of improving the residence, effective through the end of 2025.
The standard deduction for federal taxes has more than doubled. The new tax law means that fewer people will benefit from itemizing deductions. Home owners and buyers need to weigh the other pros of homeownership, like building wealth through equity and appreciation in value over time.
Cash in Your Pocket: One of the biggest arguments for not scrimping and saving to pay off your mortgage is you can have more cash available for things you want to do (travel, dine out, entertainment) and for things you might have to do (make repairs to your home or cover major health expenses). If you’re considering selling your home to pay off your mortgage before retirement and then renting, think about the potential threat of inflation. Each year, you will need to renew your lease, which will likely increase.
Cons of Having a Mortgage in Retirement
Having too much mortgage debt in retirement may be risky, especially if you are living on a fixed income of Social Security and perhaps a pension. You might not have the wiggle room for a big increase in expenses.
Lower Tax Deductions: The tax benefits from holding a mortgage may drop significantly when you retire. You may be paying much less interest on your loan, resulting in a much smaller interest deduction. It’s likely your income will be less than it was when you were working. Your tax bracket will be lower, so mortgage interest and real estate tax deductions may have less or no value.
Unexpected Major Expenses: Outright home ownership can be an important resource to cover unexpected expenses. You can take out a home equity loan or even a reverse mortgage. Remember there are costs involved in securing those, and they’re likely to come with higher interest rates than a primary home loan. It’s smart to consider how liquid your other assets are.
Investment Portfolio Risk: The chance that your investment portfolio will take a big hit during your retirement makes being mortgage-debt-free an important increase in financial stability. There can be a significant relationship between retirees’ comfort with their debt levels and financial satisfaction. Focus on your comfort with debt and the risk level of your other investments
One thing my husband and I have learned, and what experts advise, is that the more we can do with our possessions and our home while we can still make those decisions ourselves, the easier and more profitable it will be for our children. With the help of an attorney, we’ve made it easy for our children to sell our home. However, we are already being asked why we choose to stay in a home that is obviously larger than we need. We think we have lots of very good reasons, and so far our children aren’t pushing us one way or the other, but our situation could easily change.
When age or other circumstances make a safer and more easily maintainable home seem like a good idea, our best choice might be to move to a smaller home that is easier to care for. We might need to sell the big house and use the profits from the sale to supplement retirement income and pay for needed services or assisted living.
The best home-ownership approach for you could depend on how you feel about debt, your age, how much money you’ve put aside for retirement, where it’s invested, your retirement-living goals, and how disciplined you are about saving and spending.