To Have Or Not To Have a Mortgage in Retirement :: Wamhoff Financial & Accounting


To Have Or Not To Have a Mortgage in Retirement

Traditional wisdom has tended to favor the position of focusing on paying your house off as quickly as possible to eliminate the debt. While there are circumstances where this can be a good move, there are scenarios in which it may make sense to have a mortgage – even in retirement. Bob Wamhoff, President of Wamhoff Financial Planning and Accounting Services, discusses when it may or may not be a good choice for you.

Scenarios in which it may make sense to have a mortgage in retirement:

  1. You are buying a new home and planning to pay cash
    • While many clients talk about downsizing in retirement, my experience is that many end up spending more even if the home is smaller.
    • Many people will opt to take funds from their investments to pay cash for a new home in retirement. This takes money out of your portfolio, and you lose the potential for that money to grow.
    • That money is now tied up in an asset that you cannot access unless you opt for a loan such as a reverse mortgage, which may result in a higher cost than a mortgage in terms of closing costs and fees.
    • In this case, the client could consider putting 20% down on the new home, and take out a 30 year fixed mortgage to take advantage of today’s low interest rates.
    • If interest rates were higher, such as they were many years ago when hovering at the 7-1/2% mark, this likely would not be a good strategy.
  2. You’re trying to pay off your mortgage early
    • Many clients stress themselves financially trying to pay extra on their mortgage to eliminate the debt and not have the payment in retirement.
    • Yet, taking the extra money you’d pay (especially if you have a low interest rate on your mortgage) and investing it could put you ahead in the long run.

The goal in all of the above scenarios is to invest in a manner that is appropriate for your goals and risk tolerance so that the growth of your portfolio outweighs the cost of the mortgage.

Scenario in which it may not make sense to have a mortgage in retirement:

  1. Your house is already paid off and you’re not planning to move
    • It’s typically not advisable to refinance your home to pull out equity and invest it.
    • As mentioned above, a reverse mortgage is a loan that many use to access their equity. The fees are high and it should be used only as a last resort.
    • Instead, invest over the long-term to grow your portfolio and create a financial plan so you don’t have to rely on your home’s equity to live in retirement.

We know that each individual situation is different and the above may not be appropriate for all. Before making any investment or mortgage decision, seek the advice of a professional who can help you analyze your options and choose the path most appropriate for you.