Should a Retiree Ever Take Out a Mortgage?

Conventional wisdom says to time your mortgage to be paid off before you enter retirement, so you own your home free and clear.

Maybe you’ve done that, but now you’re moving or buying a second home. Does that rule still apply, or with interest rates still so low, should you look at financing? Or perhaps you’re downsizing and now’s your chance to be rid of that mortgage and pay cash. What’s the best move?

That’s going to depend a great deal on what funds you have available to live on, and how much margin — or wiggle room — you have. While it certainly feels good to own your home outright, and there is wisdom in not being slave to a lender as the Proverb has it, in some cases the most prudent course is to take out a mortgage.

What you don’t want to do, for instance, is tie up all or even most of your money in your home, leaving you short. When things get tight, you most certainly can’t pull out your kitchen sink and carry it down to the local store to trade for groceries. While carrying a mortgage does add to your monthly expenses, it allows you to hold on to the bulk of your money, providing liquidity for monthly living costs as well as emergencies.

Nor do you want to take a big chunk out of your IRA account in one calendar year to buy a second home, let’s say. You might find yourself in a higher marginal tax bracket than you would versus taking it over several years, or even get hit with an income adjustment to your Medicare Part B or D premiums. Taking out a mortgage and taking withdrawals over a period of time may alleviate that.

Getting a Mortgage in Retirement

But can you even get a mortgage in retirement? Don’t you need a job for that? Not necessarily. If you have steady income, such as from a pension, or even regular withdrawals from an investment account, you may qualify. Your best bet is to talk to your local bank or a mortgage broker ahead of time to see what kind of income is required, so if you need to have a regular stream of income for a prescribed number of months in advance of your application, you can get that in place.

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You may be surprised to find out that the length of your mortgage does not need to be limited to your expected life span. That is to say that, presumably, an 80-year-old can take out a 30-year mortgage, without discrimination, even though it is unlikely that he will outlive the term of the mortgage. So if you determine that a mortgage is right for you and, like that 80-year-old, you most likely will not outlive your mortgage, you may as well take out the longest term you can — assuming preserving equity for your heirs is not an issue.

There is another way to purchase a home with a mortgage, but one that doesn’t require a payment — that is with a reverse mortgage purchase. A reverse mortgage for purchase works similarly to a traditional reverse mortgage in that you are in essence borrowing against your equity each month, but are not required to make a current payment. However with this plan, you do make a large down payment (perhaps up to 50%, depending on your age and other factors). This can be nice if you are downsizing, because you can use some of your proceeds for the down payment and pocket the rest. As with any reverse mortgage though, you should weigh the potentially steep costs against your need for preserving the equity in your home.

Also, your credit is still an important factor in helping you get a mortgage — and the better your credit, the lower your interest rates. If you think you’ll be taking out a mortgage in the not-too-distant future, now’s the time to check in with your credit. Pull your free annual credit reports through AnnualCreditReport.com to check for errors or any other issues that are hurting your credit, and check your credit scores (which you can do for free through Credit.com) to see if they’re in a good range to get you the best rates.

Does it ever make sense then to pay cash for a home in retirement? You bet. If you are in the position where you have enough funds to sustain your lifestyle with no need to access the money tied up in real estate equity, then rest easy in your paid-off home.