Retirement can evoke s of a relaxing, debt-free life with no monthly mortgage payment, assuming you have already paid it off. However, some financial planners suggest retirees continue to carry a mortgage into and throughout retirement.
Reinvesting the proceeds from your home equity to generate a stream of income might make your golden years more golden.
There is no one-size-fits-all way to increase retirement income, so having a mortgage in retirement can be helpful in some situations but can also be bad in others.
Retirement should be your golden years – a time to relax and enjoy life without financial stress. But what about that mortgage payment that’s been following you around for decades? Should you finally kick it to the curb or might there actually be benefits to keeping it around?
As someone who’s researched this topic extensively, I can tell you that the answer isn’t black and white. There’s no one-size-fits-all solution when it comes to mortgages in retirement. What works for your neighbor might be financial suicide for you!
Let’s dive into this complex topic and figure out if carrying a mortgage into retirement makes sense for your unique situation.
The Old School Thinking vs. New Financial Reality
Our parents and grandparents had a simple goal: pay off the house before retirement. Period. Being debt-free was considered the ultimate achievement before leaving the workforce.
But times have changed, and so has financial advice. Many financial planners now suggest that carrying a mortgage into retirement can actually be a smart strategy for some people. Shocking, right?
As the saying goes, “you can’t eat your home.” Your home equity just sits there, generating zero income unless you tap into it somehow.
Pros of Carrying a Mortgage into Retirement
1. The Investment Potential
The idea behind it is pretty simple: instead of putting a big chunk of your wealth into your home, you might be able to make more money by investing that money somewhere else.
For example, if your mortgage interest rate is 4%, but your investment portfolio averages 7% returns, you’re potentially coming out ahead by 3%. That’s free money, baby!
Here’s a quick comparison:
| Option | Pros | Cons |
|---|---|---|
| Pay off mortgage | Peace of mind, guaranteed “return” | Money tied up in illiquid asset |
| Keep mortgage, invest | Potential for higher returns | Risk of investment losses |
2. Tax Benefits Can Still Apply
Mortgage interest is tax-deductible, which can reduce your overall cost of borrowing. While the Tax Cuts and Jobs Act of 2017 did limit this benefit somewhat, it’s still valuable for many retirees.
However, be aware that these deductions are now limited to interest on $750,000 of qualified residence mortgages (down from $1 million previously).
3. Increased Diversification
Having your money spread across different asset classes (stocks, bonds, real estate) rather than mostly in your home can provide better diversification. This helps protect against risks associated with having too much money in a single asset.
“It’s riskier than most people think to put all your eggs in one basket, which is your home,” said one financial planner. “.
Cons of Carrying a Mortgage into Retirement
Before you get too excited about taking out a loan against your home equity, let’s look at what could go wrong.
1. The Psychological Burden
There’s something profoundly comforting about knowing your home is paid for. Many retirees simply sleep better at night without debt hanging over their heads.
John, a retired neighbor, recently told me, “I could have kept my mortgage and maybe made more in the market, but knowing my home is paid for gives me peace that no investment return could match.” “.
2. Investment Returns Are Not Guaranteed
The whole strategy of keeping a mortgage to invest the difference relies on your investments performing well. But here’s the reality check: markets fluctuate, sometimes dramatically.
Your mortgage payment stays the same whether the market is up or down. During a prolonged downturn, you could find yourself in a tough spot where your investments have shrunk while your mortgage obligation remains unchanged.
3. Increased Leverage Equals Increased Risk
By keeping a mortgage, you’re essentially using leverage – borrowing money to invest. This can amplify both gains AND losses.
During market downturns, this leverage can create tremendous stress. Many retirees end up selling investments at the worst possible time to eliminate the anxiety of debt during market crashes.
Key Factors to Consider Before Deciding
Your Risk Tolerance
Be brutally honest with yourself. How well do you handle financial stress? If market dips keep you up at night, paying off your mortgage might be the better choice regardless of the potential math advantage of investing.
Your Hurdle Rate
Your mortgage interest rate represents the hurdle your investments must overcome to make this strategy worthwhile. If your mortgage costs 4% after tax benefits, your investments need to consistently earn more than that to come out ahead.
For example:
- Mortgage rate: 4.5%
- Tax bracket: 22%
- After-tax mortgage cost: ~3.5%
- Required investment return to break even: >3.5%
Your Overall Financial Picture
Consider how much of your net worth is tied up in your home. If your $400,000 home represents half of your $800,000 net worth, this decision is hugely important. If your $400,000 home is just 10% of your $4 million net worth, it’s less critical.
Real-World Scenarios: When to Keep vs. Pay Off Your Mortgage
Scenario 1: Keep Your Mortgage If…
- You have a low fixed interest rate (under 4%)
- You have a diversified investment portfolio that historically outperforms your mortgage rate
- You have substantial retirement savings beyond your home equity
- You’re comfortable with some financial risk
- You benefit significantly from the mortgage interest tax deduction
Scenario 2: Pay Off Your Mortgage If…
- You have a high interest rate
- You’re extremely debt-averse and value peace of mind
- You don’t itemize deductions on your tax return
- You have limited retirement savings outside your home equity
- You’re concerned about maintaining mortgage payments if investments underperform
Alternative Ways to Use Home Equity in Retirement
If you’re not comfortable with either extreme (fully paid off or traditional mortgage), there are middle-ground options:
Reverse Mortgage
A reverse mortgage allows homeowners 62+ to convert home equity into cash without monthly mortgage payments. The loan is repaid when you move, sell, or pass away.
This can provide retirement income while allowing you to stay in your home, but comes with fees and reduces the inheritance you’ll leave behind.
Downsizing
Many retirees find that selling their larger family home and moving to a smaller, less expensive property makes financial sense. This can free up equity without the need for debt.
As my client Martha told me, “We sold our 4-bedroom suburban house and bought a 2-bedroom condo outright. We invested the difference and now have an extra $1,200 a month in income.”
Home Equity Line of Credit (HELOC)
A HELOC provides access to your equity when needed but doesn’t require regular payments on the full amount. This flexibility can be valuable in retirement, serving as an emergency fund or providing funds for major expenses.
What Financial Experts Actually Recommend
I’ve talked with numerous financial advisors about this topic, and they consistently emphasize that this decision should be personalized based on:
- Your complete financial situation
- Your tax circumstances
- Your emotional relationship with debt
- Your other sources of retirement income
- The current interest rate environment
One certified financial planner told me, “For clients with stable pension income and substantial savings, keeping a low-rate mortgage often makes mathematical sense. But for clients with variable income or who express anxiety about debt, I typically recommend paying it off despite the potential opportunity cost.”
Steps to Make Your Decision
- Calculate your true mortgage cost after tax benefits
- Assess your investment potential realistically, not based on best-case scenarios
- Consider your emotional response to carrying debt in retirement
- Consult with financial professionals who understand your complete situation
- Create a detailed retirement budget with and without mortgage payments
My Final Thoughts
In my experience researching and writing about retirement planning, I’ve found that the “right” answer varies tremendously based on individual circumstances.
The mathematical answer might suggest keeping a mortgage and investing, but the psychological benefits of mortgage freedom shouldn’t be underestimated. Many retirees who’ve paid off their homes describe it as incredibly liberating, even if they theoretically left money on the table.
Remember that retirement is about more than maximizing every last dollar – it’s about creating the lifestyle and peace of mind that will make these years truly golden for YOU.
Whatever you decide, make sure it’s an informed choice that considers both the numbers AND your comfort level. After all, what good is an “optimal” financial strategy if it causes you stress or anxiety?
Have you thought about how a mortgage fits into your retirement plans? What factors are most important in your decision? I’d love to hear your thoughts in the comments!
Hurdle Rate
There are a lot of objective financial factors you need to think about to figure out if this strategy will work for you in your current financial situation. There are some financial planners who give everyone the same advice, but this plan doesn’t work for everyone.
Finding out how much your total mortgage interest costs is an important thing to think about because that’s the rate your investments need to beat in order to make a net gain. The factors that affect your mortgage rate include your creditworthiness and prevailing mortgage interest rates.
Of course, the better your credit, the lower your total interest cost. Furthermore, the higher your tax bracket, the more tax benefit you receive from the interest write-off.
Cons of Carrying a Mortgage into Retirement
Despite the potential benefits, having a mortgage in retirement strategy can cause some unpleasant side effects. Using this strategy can increase your total asset exposure to include your house and investments.
However, taking out a mortgage is another form of leverage, which can increase your total risk exposure and complicate your financial life. Also, the income earned from your investments will fluctuate, and you could lose all or a portion of your invested funds. Prolonged market downturns can negatively impact your retirement portfolio and be challenging to manage.
Furthermore, the Tax Cuts and Jobs Act of 2017 mitigated the deductibility advantage. Taxpayers can deduct interest on $750,000 of qualified residence mortgage (down from $1 million). The act also suspended the deduction for interest paid on home equity loans and lines of credit unless they are used to buy, build or substantially improve the home, securing the financing.
The Truth About Retiring With A Mortgage
FAQ
What percentage of retirees still have a mortgage?
Approximately 41% of U. S. According to the Joint Center for Housing Studies at Harvard University, 65% of homeowners aged 65% to 2079% had a mortgage in 202022, up from 20%24% in 1989. This is a big jump from the previous year.
Does Suze Orman think you should pay off your mortgage?
Personal finance guru Suze Orman says it depends. While the possibility of job loss can trigger financial panic, Orman advises against rushing to drain your savings to pay off your mortgage early. Don’t call the emergency line until you have to, even if you have enough saved to pay off your mortgage.
What is the biggest mistake most people make regarding retirement?
The top ten financial mistakes most people make after retirement are:1) Not Changing Lifestyle After Retirement. 2) Failing to Move to More Conservative Investments. 3) Applying for Social Security Too Early. 4) Spending Too Much Money Too Soon. 5) Failure To Be Aware Of Frauds and Scams. 6) Cashing Out Pension Too Soon.
At what age should you stop paying a mortgage?
To O’Leary, debt is the enemy of any financial plan — even the so-called “good debt” of a mortgage. According to him, your best chance for long-term financial success lies in getting out from under your mortgage by age 45.
Can you retire with a mortgage?
Retirement is something most people dream of — and part of that dream is debt-free living. But what if you’re headed into retirement with a mortgage? If you are, you’re certainly not alone. GOBankingRates spoke with financial experts to get the low-down on whether or not you can — or should — retire with a mortgage. Here’s what they said below.
Should you carry a mortgage during retirement?
Describe the pros and cons of carrying a mortgage during retirement. You could say that paying off the mortgage in retirement would mean spending all of your savings, and some people might feel better leaving that money in the bank. Note the ways to tap home equity if necessary.
Can you retire with a mortgage on a rental property?
However, if you plan to use the rental income for your own retirement, having a mortgage on the rental property might limit the income you can actually spend, as mortgage payments will reduce your available cash flow.” What it all comes down to is that while retiring with a mortgage is possible, it requires careful financial planning.
Can a retiree get a mortgage in 2025?
The good news is that with due diligence and a carefully crafted financial plan, retirees can get the mortgage they need for a new home in 2025. Can you use retirement income to qualify for a mortgage? Like with any home purchase, more income and less debt are ideal. Yet that goal can be a unique issue for older homebuyers.
Should you pay off your mortgage in retirement?
Indeed, over 10 million homeowners paying off their mortgage are 65 and older, according to a study by mortgage broker LendingTree. 1 That constitutes about 1-in-5 senior homeowners. Not having to put part of your retirement income toward a monthly mortgage payment in retirement will certainly make it easier to meet your other expenses.
Can a retiree land a decent mortgage?
With interest rates still stubbornly high and home prices elevated, here’s how a retiree living on a fixed income can land a decent mortgage. When you purchase through links on our site, we may earn an affiliate commission. Here’s how it works. Retirees settling into their golden years may be considering the idea of a new home.