For Retirees, a New Mortgage Might Just Work Out

NEW YORK (MainStreet) -- Financial advisers have long urged clients to avoid taking on large mortgages in retirement, but in today’s unusual market, a mortgage can make sense for retirees in the right circumstances.

The key question: How long will you stay in the home? A longer stay can reduce the risks associated with the loan.

Common wisdom says it’s bad to carry a lot of debt in retirement, and that still holds true for most people. Avoiding debt means avoiding interest charges. And the lower your monthly expenses are, the easier it will be to weather a financial setback.

About two-thirds of homeowners 65 and over carry no mortgage, according to the Census Bureau, while the vast majority of younger homeowners have mortgage debt. Older homeowners have had more time to pay off their mortgages, and even if they still have loans, older homeowners typically owe very little compared to the property’s current value.

All that equity, then, can be used to pay cash when moving to a new home in retirement or it can be tapped for ordinary expenses later, through a home equity loan, cash-out refinancing or reverse mortgage.

With all the benefits of owning a home free and clear, why would anyone consider taking out a mortgage?

Two reasons: to keep cash available for other purposes, or to bet that investment returns will more than offset mortgage costs.

For older homeowners with plenty of resources and a willingness to take some chances, both reasons can make sense if mortgage rates are low enough, and today they are very, very low. According to the BankingMyWay.com survey, the 30-year fixed-rate loan averages just 4.35%, the 15-year loan 3.6% and the five-year adjustable-rate mortgage a mere 3%.

A homeowner who pays cash instead of taking out a 30-year mortgage would, by avoiding interest charges, effectively earn an investment return of 4.35%. With five-year certificates of deposit paying an average of just under 1.5%, you could earn more by paying cash for a home than by borrowing and putting your cash into a CD.

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