Advertisement

SKIP ADVERTISEMENT

Retiring

Paying Off the Mortgage Is Becoming Harder for Older Workers

Donald and Linda Potter still carry mortgages on their home and vacation house, but say the math makes sense with low rates.Credit...Laura McDermott for The New York Times

LIKE Archie Bunker, who celebrated paying off his home mortgage by burning his documents in a 1975 episode of “All in the Family,” many workers once routinely timed retirement to coincide with paying off a mortgage.

But now older workers, stung by a punishing decline in house prices or high consumer debt, are increasingly unable to pay off their mortgages and are heading into their retirement years with substantial amounts outstanding.

They have also been hit by unexpected expenses, layoffs, accumulated credit card bills or college loans, leaving them unable to pay off their single biggest debt unless they work longer, downsize or rely on other borrowing for the monthly payments.

Although conventional wisdom says you should pay off your mortgage before retiring, there are some exceptions. Those who are reasonably well-off financially could justify keeping the low-interest mortgage and using the money that would have paid it off to get better returns from investments elsewhere, or to fund renovations that would make it possible to stay in their home.

Whatever their choice, more retirees are carrying mortgage debt. In 2011, three times as many older homeowners were leaving the workplace still owing a monthly mortgage compared with 2001, according to the most recent data from the Consumer Financial Protection Bureau. And 6.1 million homeowners age 65 and older were paying monthly mortgages in 2011, up from 3.8 million in the same age group about a decade before, the data showed..

And the amounts owed have grown significantly, said Christopher J. Mayer, a Columbia Business School professor of real estate, finance and economics. Inflation-adjusted mortgage debt for homeowners age 60 to 65 more than tripled, from less than $30,000 to about $100,000, between 1992 and 2010, he found.

“When we updated our data through 2013, the higher amounts remained steady,” he said. “The share of homeowners in this age group who do not have a mortgage has fallen to about 45 percent. That compares to 55 percent a decade ago. These are tough numbers for retirees to overcome.”

Sometimes even the most carefully laid plans to retire a mortgage can go awry. Stewart H. Welch, 64, a registered investment adviser in Birmingham, Ala., said he planned to practice what he had preached to his clients: a debt-free retirement. And he did, paying off the family home several years ago.

“Then my wife had a stroke and could no longer drive, so we needed to move where she could walk for shopping, groceries and to get her nails done,” he said.

That meant buying and renovating a home that was closer to amenities, and required taking out another mortgage.

“I focused on paying that off and am now debt-free — again,” said Mr. Welch, the author or several books on finances.

Having no substantial debt in retirement is more than just financial, he added. “I’ve been through it twice, and there’s a feeling of freedom and accomplishment that makes a real difference.”

Sharon Weekes, 57, a public health employee for Westchester County, N.Y., also sought debt-free retirement years. She and her husband bought a two-family home in New Rochelle, renting out one side of it. He died in 2004, and she shouldered the mortgage on one income.

She devised a plan with a financial adviser, made available through her employer, to retire next April. The plan took into account her sources of retirement income, which will include a pension, deferred compensation and, later, Social Security benefits.

“I keep my credit cards empty,” she said, and has set aside funds to deal with any unexpected house repairs. She said she might downsize eventually but did not want to rely on a reverse mortgage or personal line of credit. “Then you really don’t own the house,” she said. “Why add to your financial burden?”

Tapping into home equity is one of the reasons older people run real risks of foreclosure, warned Lori A. Trawinski, who wrote an AARP Public Policy Institute report on mortgage debt.

An examination of nationwide loan data as of 2011 in the report, “Nightmare on Main Street: Older Americans and the Mortgage Market Crisis,” found that more than three million Americans were at risk of losing their homes, with delinquent payments and foreclosures increasingly common.

“The foreclosure rates have fallen since then,” Ms. Trawinski said, “but they are still elevated compared to historic rates.”

Despite less home equity, “people have a strong preference for aging in place” so it’s difficult to determine whether carrying a mortgage in retirement is bad advice for them, she said.

Retirees have other financial options, including a line of credit and a reverse mortgage, in which the homeowner can draw down on the equity built up in a home. Even so, last year fewer than 50,000 people opted for a reverse mortgage — and the federal government, which insures them, is likely to tighten requirements by requiring lenders to verify the borrower’s ability to cover tax and insurance payments.

Marcyne Acker, 77, of Fountain Valley, Calif., chose a reverse mortgage when her husband, David, died last year and she faced some expensive repairs on the house they bought in 1972. The couple had refinanced their three-bedroom ranch home several times to cover family medical and other needs.

With less income coming in, she considered downsizing but found that selling the house, appraised around $600,000, would not net her enough to afford even a smaller property in the pricey California housing market. And if she moved, she was not likely to keep her low property tax rate.

After “a lot of trepidation,” she said, she took a reverse mortgage with a 2.8 percent interest rate, plus a 1.25 percent annual insurance rate, that covers her $1,472 monthly mortgage. She withdrew about $25,000 to pay for new windows, attic duct work and house painting.

“I got rid of all my credit cards so I only have the property tax and insurance to pay,” she said. “And I want to try to pay back the money because my sons would have to otherwise pay it back or buy the house eventually.”

For those who have the wherewithal to pay down their mortgages but choose not to, Bert Whitehead, president of Cambridge Connection Inc., a financial advisory firm in Bloomfield Hills, Mich., urges them to have a 50 percent mortgage.

“We recommend a 30-year fixed mortgage so our clients can earn more after taxes than the mortgage costs, employ the tax deduction and enjoy protection when interest rates rise,” said Mr. Whitehead, the author of “Why Smart People Do Stupid Things With Money.”

“If interest rates drop, they can pay it off,” he said, “but this only applies if they place the mortgage proceeds in a balanced investment portfolio.”

Donald Potter, a retired hospital executive, and his wife, Linda, both 67, of Ann Arbor, Mich., have mortgages on their main home and their Lake Michigan vacation house. Both have pensions that comfortably cover their $3,000 monthly mortgages. Even so, Mr. Potter initially blanched at the prospect of continuing to carry mortgage debt into his post-career years.

“Then we did the math and saw that it makes sense to have a mortgage at 3.5 or 4 percent, and be earning money in the market at 7 to 8 percent, plus you get the tax write-off,” Mr. Potter said. “But if investments turn south, you’re in a safer position if you’re mortgage-free.”

For those who want to be financially unencumbered in retirement, Jane Bryant Quinn, a columnist for the AARP Bulletin and author of “Making the Most of Your Money Now,” advises people to first pay off their consumer debt and to increase their retirement plan contributions.

“Don’t take money out of a retirement plan to pay such debt,” she said. “Hang onto tax-sheltered money. If you are a conservative investor whose alternative is U.S. Treasuries or certificates of deposit, pay off the mortgage. If your alternative is stocks, and you will hold them for 10 or more years, take that option.”

A version of this article appears in print on  , Section B, Page 4 of the New York edition with the headline: Paying Off the Mortgage Grows Harder for Older Workers. Order Reprints | Today’s Paper | Subscribe

Advertisement

SKIP ADVERTISEMENT