Mortgages have been a part of American life for generations. Very few people — especially early in their careers — have the resources to plop down the full payment on a home, so the vast majority of us live with a monthly mortgage payment.
In past generations, the mortgage was often paid off well before the golden years, but increasingly, people are carrying their mortgage payment with them into retirement.
According to the U.S. Consumer Financial Protection Bureau, in the decade between 2001 and 2011, the percentage of Americans 65 and older who hold a mortgage increased from 22 to 30 percent. And the rate jumped to more than 21 percent for homeowners 75 and older, up from just 8.4 percent in 2001. That means a lot of baby boomers are going to be sinking money into mortgage payments deep into their retirement, while their parents at similar ages would have been living in homes they owned free and clear.
The causes are varied: The average home costs a lot more than it used to, while average wages haven’t kept up with rising costs. In addition, with the rise and fall of interest rates, many people cyclically refinance their mortgages and open home equity lines of credit to get much-needed cash. While a lower interest rate is a good thing for borrowers, refinancing tends to extend the loan period.
In October, the Federal National Mortgage Association (otherwise known as Fannie Mae), issued a report about the issue. “The leading edge of the large baby boom generation has reached retirement age with a greater likelihood of carrying housing debt, raising concerns about their retirement financial security,” Fannie Mae noted in its report. “The oldest boomers, who were aged 65-69 in 2015, were 10 percentage points less likely to own their homes outright than were pre-boomer homeowners of the same age in 2000.”
As a result, Fannie Mae warned, some retirees may find their financial security reduced, with less money available to cover living expenses. It could also increase vulnerability to foreclosure and limit the “accumulation of housing wealth.”
Of course, many people consider housing debt to be just a part of their financial portfolio and manage it as they would any investment. But the volatility of the markets in recent years has made that decision more difficult, especially for consumers who have enough money socked away to pay off the mortgage if they had to.
Financial expert Wes Moss, who hosts the nation’s longest-running live call-in, investment and personal finance radio show on Atlanta’s WSB radio, wrote about the issue recently on the Clark Howard website. As to the question of whether seniors should pay off their homes into retirement, he says the answer is “a qualified yes.” He gives a couple of pointers:
- Pay extra. Paying more than the minimum payment (or making an extra payment each year), Moss advises, can have dramatic effects over the long term. “Most happy retirees who own their homes outright paid off their mortgage early little by little, making more than the minimum monthly payment over several years,” he said. “In my experience, probably 70 percent of retirees who are mortgage-free used this method to reach that goal.”
- Don’t raid your retirement savings to pay off the mortgage. Although it might be tempting to do so, he notes, withdrawing extra money from your IRA or 401K will generate tax penalties and increase stress. While taking money from other savings is a better option, it could leave you in a lurch later if you need the cash. Moss advocates the “one-third rule.” If you can pay off your mortgage with no more than one-third of your non-retirement savings, you should consider doing so,” he said.
As always, though, it’s wise to consult with a qualified professional before making any investment decision. For some good advice on finding a certified financial planner, visit The Motley Fool’s website at https://www.fool.com/investing/general/2015/06/05/how-to-find-a-certified-financial-planner.aspx.