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When It Pays to Have a Mortgage in Retirement—and When It Doesn’t

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Stop your mortgage before you quit your job.

While that’s standard advice for people nearing retirement, it may not be realistic for retirees who buy or refinance their homes later.

Those who can afford to pay off their mortgage may find that there are cases where they keep the loan after retirement.thanks to higher interest ratesInvesting your savings in bonds instead of paying back the principal could yield enough returns to cover more than the cost of interest on your monthly mortgage.

“A year ago, the math in favor of paying off your mortgage early was pretty compelling,” said Alan Ross, a financial planner in Colorado Springs, Colorado. Said.

Americans are now far more likely than previous generations to carry their mortgage debt into retirement. As demonstrated by 3 of the 4 retirees The Wall Street Journal profiled last weekIn 2019, the most recent year for which data are available, nearly 38% of those aged 65 to 74 had a mortgage or home equity credit line as their primary residence, according to the Federal Reserve. was This is up from 22% in 1989.

When interest rates were low, many homeowners refinanced to new 30-year loans. For many older borrowers, these refinancings extend the loan term into retirement, according to Craig Copeland, director of wealth benefit research at the nonprofit Employee Benefits Institute.

“If the mortgage rate is 7% or 8% and you can refinance to 2%, why not?” he said.

Many retirees feel they can’t afford to pay off their mortgage in full, or are better off prioritizing other goals. Many people prefer to keep an extra cash cushion in their bank or brokerage account rather than use it to pay off their mortgage. This is because accessing home equity in an emergency can be difficult and expensive.

For those who have the ability to repay their mortgage, consider the following:

Two rates to compare

If you can afford to pay off your mortgage now, an important calculation is comparing your mortgage interest rate to the yield of ultra-low-risk investments such as Treasuries and bonds, says Ross. The goal is to see if you can earn enough after-tax interest to cover the ongoing interest on your mortgage.

Consider a person with a $100,000 mortgage with an interest rate of 3%. Paying off that mortgage saves the homeowner 3% a year and gives her a guaranteed 3% return.

That person can also use the $100,000 to buy short-term Treasury bills. This guarantees a slightly higher interest rate of around 3.49%.

“If your bond payments are high, buy bonds and enjoy the extra money,” said Bart Hutchinson, an adviser in Wilmington, Delaware.

What about investing $100,000 in stocks for even higher returns to cover your mortgage payments and generate greater profits? We have achieved a return of %.

Lucifer Ltd.

— which is much higher than the interest rates many mortgage borrowers are paying on their mortgages these days.

But that 7% return isn’t guaranteed. So far this year, the S&P 500 is down about 16.8% through his Sept. 1. And from the end of 1965 to his end of 1981, the S&P 500 annualized return was about 1.8% without a dividend.

This shows the risks of such a strategy. “It’s not for the risk averse,” said Elliott Dole, an adviser to St. Louis.

Consider tax implications

Taxes can change the math on your decision to pay off your mortgage, generally favoring debt repayment.

Far fewer homeowners are getting tax credits for mortgage interest payments since the 2017 tax reform, which significantly increased the standard deduction.

Mortgage costs should be reduced to reflect tax benefits when deciding whether to pay off a mortgage, Ross said.

If the above homeowner with a $100,000 mortgage with a 3% interest rate receives the mortgage interest tax deduction, the cost of that 3% mortgage would be reduced to 2.34% after accounting for tax benefits (this assumes the homeowner is 22 years old). % tax brackets. )

Homeowners should compare the 2.34% after-tax cost of a mortgage to the after-tax return available on government bonds. A person belonging to the 22% tax rate will lose his 22% of her 3.49% of banknotes as tax interest. After-tax profit margins will be 2.7%, Ross said.

With an after-tax return of 2.7% on bonds, which exceeds the after-tax cost of a mortgage of 2.34%, the strategy of buying bonds to pay off mortgages remains the more profitable option, Roth said. says.

However, the bond’s 2.7% after-tax return is insufficient to cover a 3% mortgage if homeowners do not receive the full tax benefits of taking the deduction. As a result, taxpayers get higher returns by paying off their mortgages.

Despite forecasts of a cooling housing market in 2022, U.S. home prices are still hitting record highs despite a surge in mortgage rates in recent months. WSJ’s Dion Rabouin explains what’s driving demand, if there are signs of a slowdown, and what that means for the economy. Photo Synthesis: Ryan Trefes

The impact of mortgage repayments on liquidity

If you pay off your 3% mortgage and realize you need to take advantage of your home equity in retirement, you may regret it.

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Is It Worth Getting A Mortgage In Retirement? why not? Join the conversation below.

Retirees with significant assets but little income can struggle to qualify for a new mortgage, Mr. Dole said. I was turned down for a mortgage on my main residence and had to sell my property to meet my cash needs.

Compared to mortgages and other forms of mortgages, including reverse mortgages, keeping a primary mortgage “could be a low-cost way to close the funding gap,” Dole said. ‘ said.

Even when the math is favorable, some retirees may feel more comfortable paying off their loans as soon as possible. He said he could get peace and a sense of accomplishment.

Write to Anne Tergesen: [email protected]

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