More seniors carrying mortgage debt into retirement
When Helen Berkenbush's husband began having health problems in 2008, the Clifton, N.J., couple decided to rev up their efforts to wipe out the mortgage on their two-family home. "Any extra dollar we had, we threw at the mortgage," she said.
Using tax refunds, overtime payments and savings, the couple paid off their loan within a couple of years.
"I am so glad we did," said Helen Berkenbush, 73, a retired secretary whose husband died in April. "If I had that mortgage, I could not stay in my house."
Janet McMullan, 69, of River Edge, N.J., has made a different decision about home debt. She still carries a mortgage and home equity loan, because to pay them off, she'd have to withdraw money from her individual retirement account, and pay taxes on it.
"It makes no sense to take money out of my IRA because that's taxed," said McMullan, a retired financial-services executive.
Paying off the mortgage before retirement has been the goal of generations of homeowners; some even celebrated with a mortgage-burning party. But an increasing number of households carry housing debt into their retirement years, according to the Federal Reserve's Survey of Consumer Finances. Almost 1 in every 3 29 percent of retired households had housing debt in 2010, up from 16.7 percent in 1989. The median amount of retirees' housing debt also tripled in that time, to about $61,000, adjusted for inflation.
Even among the oldest households headed by people age 75 and up 1 in every 5 had housing debt, up from 5.8 percent in 1989.
These families were able to trade up to larger homes or borrow against their equity when property values ballooned during the last decade and lenders loosened their credit standards. As a result, many people took on mountains of home debt to pay off credit cards and to finance bigger houses, home improvements or college tuitions.
That means more households now head into retirement with high monthly payments, just at the time their incomes are sliding. AARP, the advocacy group for older Americans, is worried about the trend and recommends that homeowners try to pay off their mortgage before retirement.
"The more they can reduce their expenses when they're not working, the better off they'll be," said Jean Setzfand, AARP's vice president for financial security. "The mortgage payment is one thing that's predictable, and a goal that people should work for, in terms of removing that expense from their ledger."
Lauren Locker, a fee-only financial planner in Totowa, N.J., agrees that, if possible, it's best to go into retirement mortgage-free. But she said that targeting every extra penny toward paying off the mortgage may not always be the best strategy.
For example, anyone with credit card debt should wipe that out before paying off the mortgage, for two reasons. Credit card debt typically carries a much higher interest rate, and the interest is not tax-deductible, as it is with mortgages.
It's also important to build up an emergency fund of several months' worth of living expenses before paying off a mortgage. And if you're still working, you should funnel as much money as you can to a tax-advantaged retirement savings plan, such as a 401(k), 403(b) or individual retirement account, Locker said.
Some homeowners may be planning to pay off their mortgage only when they actually retire, sell the house and move to a lower-cost area, Locker said. For them, it's not as urgent to whittle down the mortgage in their 50s and 60s.
Karl Graf, a fee-only financial planner in Wayne, N.J., said for many retirees, paying off the mortgage has psychological, as well as financial, benefits.
"For a lot of middle-class people, the house is the most significant asset, and it's got a symbolic value," he said.
Still, in some cases, retirees who can afford monthly mortgage payments might want to hold onto some savings rather than put everything toward paying off the mortgage. That way, they have quick access to cash if they need it.
"If the interest rate (on the mortgage) is low enough, sometimes it makes sense not to pay it off," Graf said. "Liquidity is always a good thing."
Of course, retirees can always take out a reverse mortgage later against their home's value, but those take time and often have large upfront fees.
Retiree McMullan, who lives in a 1950-vintage expanded ranch, has made a similar calculation. She has about $90,000 in home debt, including a $73,000 mortgage at 6 percent and a $17,000 home equity loan with an adjustable rate that's running 2.5 percent.
She grew up with the idea of paying off the mortgage as fast as possible.
"It's a psychological thing, from my Depression-age parents," she said. "The whole thing was, you pay off your mortgage. But cash flow is more important to me than having no debt."
In addition, most of her money is in individual retirement accounts and would be taxed if she took it out to pay the mortgage.
Some of the other reasons that people cite in not paying off their mortgage make less sense, according to AARP's Setzfand. For example, many homeowners want to keep the mortgage interest deduction. But the deduction may be worth less than they think. For one thing, if the homeowners have had the loan for a long time, most of their monthly payments are going toward principal, not interest, and the principal's not deductible.
In addition, once you move into your retirement years, your income typically drops.
"Your effective tax rate should be lower," said Setzfand, meaning that tax breaks are worth less.
Katherine and Joe Pursley of Mahwah, N.J., are still in their 50s, but hope to be mortgage-free in retirement. When they bought their town house a year ago, they chose a 10-year mortgage, rather than stretch it out over 30 years. And they may pay it off completely in a year, when Katherine can withdraw her retirement savings without a tax penalty.