Why A Mortgage Can Make Sense – Even In Retirement

house picket fence

Getting a mortgage, even in retirement? It can often be a smart decision.

We’ve observed several times why it often makes sense to consider getting or keeping a mortgage, even in retirement.

Now, Anya Martin, writing for The Wall Street Journal, is echoing that same advice.

In her article “When Debt Isn’t A Four-Letter Word,” Martin says many baby boomers nearing retirement are seeing the wisdom of mortgages, in light of super low interest rates and the higher returns they can earn by keeping assets invested.

“Older Americans may come out ahead by keeping 401(k)s and other holdings invested rather than cashing out to make a house payment,” says Tom Wind, executive vice president of home lending at Jacksonville, Fla.-based EverBank, who was interviewed by Martin.

That said, we don’t recommend a mortgage for everyone. Here’s the type of person best suited to a mortgage:

You still believe in growth. You can earn a decent return on your invested assets because you invest for growth and income. If, on the other hand, you’re a super-conservative Certificate of Deposit or bond investor, without a healthy dose of stocks in your portfolio, you should pass up the mortgage.

You qualify for a good rate. If your credit is good, and you have sufficient equity in your home, you’ll qualify for the lowest mortgage rates. That makes a mortgage really attractive. If someone is willing to lend you money at 3% for fifteen years, and you can average better than a 3% return with your own investments over that same period, you’re getting a great deal.

You can use the tax deduction. People used to think that your tax rate would always go down as you hit retirement. But now, that’s unfortunately not the case for many retirees. Today’s retirees pull income from IRAs, 401(k)s, and other accounts that have never been taxed, meaning withdrawals start the tax meter running. And don’t forget that Social Security and any pensions are also taxable. We work with several retirees who pay as much tax in retirement as they did when they were working.

You have good cash flow. To pay a mortgage every month, you need a decent cash flow. That may come from Social Security, a pension, working income, or your investments. Lenders like to see you have the income to make your monthly payments without having to sell the family silver.

You keep access to your money. If all your money is in your house, you can’t easily get your hands on it. Sure, you can take out a home equity loan, but we saw how that didn’t always work well during the housing recession. If having access to your capital lets you sleep well at night, maybe you should think twice about dumping it all into a pile of bricks.

You’ve got financial discipline. Here’s the clincher. Getting a mortgage makes sense because you’re borrowing cheap and reinvesting that money to make a higher return. This strategy doesn’t work if you aren’t disciplined in your own spending, and run up expensive credit card balances or pile on other debt. Mortgage debt is a powerful tool, but has to be used wisely.

 

About Mari Adam

Mari Adam, Certified Financial Planner™ and President of Adam Financial Associates Inc, has been helping individuals and families chart their financial futures for over twenty-five years. Have a question about your financial situation? Ask Mari!

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