Editors' pick: Originally published Oct. 25.
Increasingly, seniors are going against the conventional retirement wisdom about mortgages which, always before, preached that a cornerstone of a good retirement was to enter it debt free. That meant without a mortgage.
And yet about one-third of homeowners 65 and older have a mortgage now. That's up from 22% in 2001. Among seniors 75 and older, the rate jumped from 8.4% to 21.2%.
The appeal, of course, is that home mortgages are cheap; 30-year fixed-rate loans are going out under 3.7%, and 15-year fixed rates can be had for 3.1%.
That puts the question in sharp focus: is this good financial planning or is it reckless?
Understand: age discrimination is flatly illegal in home loans. But law does not dictate financial prudence and the question is: is it wiser to pay off a home mortgage if at all possible - which used to be the prevailing wisdom? That still brings a sense of relief, too. Tim Shanahan of Compass Securities Corporation in Braintree, Mass. said: "It's a great feeling to have no debt and a significant accomplishment to be able to tear up the mortgage."
But is this still the smartest planning? As more seniors take on home mortgages, experts are re-opening the analysis.
"The short answer to the question is it depends," said certified financial planner Kevin O'Brien of Peak Financial Services in Northborough, Mass. O'Brien is not being cute. So much of this is individual-centric. O'Brien continued: "It depends on how strong the person's cash flow is or not. It depends on how much liquid savings and investments they have after they might pay it off. It also depends on the balance they need to pay off in relation to their sources of cash flow, and liquid assets."
Keep in mind, too: today's retirement is not yesteryear's. About one senior in four has told researchers he plans to work past 70 years of age. That means they have income. Also, at age 70, a person has every reason to claim Social Security - there are no benefits in delaying - so that means many 70+ year-olds now have two checks coming in, plus what retirement savings and pensions they have accrued.
That complexity is why Pedro Silva of Provo Financial Services in Shrewsbury, Mass offered nuanced advice: "We like to see clients go into retirement without mortgage debt. This monthly payment can be troublesome in retirement if people are using pre-tax money, such as IRAs, to pay monthly mortgage. That means that they pay tax on every dollar coming from these accounts and use the net amount to pay the mortgage."
"If clients will carry a mortgage, then the low rates are a great opportunity to lock in a low payment," Silva continued. "We encourage those folks who don't foresee paying off their home in retirement, to stretch the payments as long as possible for as low a rate as possible."
David Reiss, a professor at Brooklyn Law and a housing expert, offered what may be the key question: "I think the right question is - what would you do with your money if you did not pay off the mortgage? Would it sit in a savings account earning 0.01% interest -- and taxable interest, at that? Paying off your mortgage could give you a guaranteed rate that is equal to your mortgage's interest rate. So if you are paying 4.5% on your mortgage and you take money from your savings account that is not spoken for -- like your emergency fund -- you would do way better than the 0.01% you are getting in that savings account, even after taxes are taken into account."
Casey Fleming, author of The Loan Guide: How to Get the Best Possible Mortgage, offered a simple way to decide which group of seniors you belong to - borrowers or no way: "Seniors with reasonable reserves, low expenses and a high aversion to taking risks should absolutely pay off their mortgages. Seniors who do not meet these criteria need to evaluate what makes the most sense for them.
He continued: "If they do want to pay off their mortgage but are concerned about being able to access equity, they can be assured that they can always get a reverse mortgage down the road should they need access to the funds."
Bottomline: there is no one answer to the question, should a senior pay off his mortgage? The right answer comes down to specifics. For some seniors, mortgages are time bombs. For others, it's just shrewd financial planning.