Reasons to Have a Mortgage After You’ve Stopped Working
Reasons to Have a Mortgage After You’ve Stopped Working – In the last edition, we evaluated the often-asked question, “Should I pay off my existing mortgage before I retire?”
There is a long-held, ingrained belief that you shouldn’t retire and transition away from your paycheck if you still have a mortgage.
This is simply not true. In fact, there are some strategic financial reasons to maintain a mortgage after you retire if all the conditions are met.
Before sharing a few considerations surrounding post-retirement mortgages, here are a few general thoughts on this limiting belief:
- Being 100% debt free is not a prerequisite for a successful and relaxing retirement.
All other things being equal, having no debt is terrific, and it’s a worthy goal. It’s a fantastic accomplishment and a satisfying feeling to owe nothing to anyone!
However, having a mortgage should not prevent you from considering a transition to retirement if your numbers still work.
Key point of emphasis: “if your numbers still work!” (This implies that you know your numbers. We strongly recommend working through the numbers yourself or with a seasoned financial advisor.) - It’s a widely held belief that you can’t qualify for a mortgage, or refinance an existing mortgage, once you’ve retired and have no earned income.
While it’s more difficult today than it was before the banking/real estate crisis in 2008, it is still possible.
Banks need to know you have more than sufficient equity in your home and how you’ll pay your mortgage. Documentation outlining your sources of income, such as pension, Social Security, investment withdrawals, etc., will likely help. - You should only carry a mortgage into your retirement years as part of a carefully crafted, well-thought-out, long-term strategy and not as a default position.
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There are several situations where carrying a mortgage can potentially be a useful tool. Here are two possible examples:
Example #1 – Factors #1, #2, and #3 Are True For You:
When the three factors we discussed in the last edition hold true for you, there is nothing wrong with carrying a mortgage beyond your retirement transition when you no longer have a paycheck through work.
As a refresher, here are the three factors again in brief form:
Liquid Money: You don’t have enough liquid money to pay off your existing mortgage or to purchase a new property in full, i.e., a winter condo in Florida or Arizona.
“Liquid” refers to an account that allows you to access the money you need to pay off the mortgage without incurring penalties, interest, and/or taxes.
For example, if most of your money is in IRAs, you must pay taxes before you can use that money.
Interest Rate: If you have a low interest rate on your mortgage, a financial argument can be made in some circumstances for maintaining that rate in a long-term fixed rate loan for many years into the future.
Tax Deductibility: Because mortgage interest is potentially tax deductible, carrying a mortgage may have a tax benefit.
The question is whether the mortgage interest is deductible. Mortgage interest is currently deductible for mortgage amounts lower than $1 million or $750,000 for mortgages initiated in 2017 and beyond.
Second, it’s only valuable if you itemize deductions on Schedule A. If you have virtually no other deductions on your tax return and you currently file using the standard deduction, the interest from your mortgage is likely not helping you (unless it throws you over the top into Itemizing your deductions).
Example #2 – Home Rich, Cash Poor, Definite Term:
A problem exists for some couples in their retirement years who have a high level of equity in their homes vs. their retirement portfolio balances. If they stay in their current home forever, they don’t have enough built up in their liquid investments to maintain their lifestyle.
They have a need to reduce monthly expenses and/or increase the size of their liquid (non-home) investments to provide the supplemental income they need.
If they don’t want to downsize their home yet but know they will do so within 10 years, a potential strategy is to strategically finance their homes to reduce monthly outlays and build up their liquid investment reserves.
For example, a couple with a higher interest loan may want to consider refinancing to an “interest only” or 7- to 10-year adjustable rate mortgage.
This may reduce their monthly mortgage payments for the duration of time they wish to remain in their home before downsizing and free up monthly cash flow. This can also help reduce their need to draw on their investments, which allows them to remain intact longer.
These are just two examples where it may be appropriate to have a mortgage after transitioning into retirement. It is important to discuss these potential strategies with a financial professional to determine if they’re appropriate for your personal financial situation.
The key point to remember is that a mortgage can be a tool in your retirement planning toolbox. It doesn’t work for everyone, but with proper planning, it can be effective for some.
This is intended for informational purposes only and should not be construed as personalized investment or financial advice. Please consult your financial advisor regarding your unique situation.
Jack Phelps
Financial Advisor / Managing Director