Take Out A Mortgage In Retirement?

Mortgage in RetirementI drank the Dave Ramsey Kool-Aid years ago, so I actually cringed when I thought about this topic.  Overall I am a big fan of paying off the house early, SUPER EARLY to know that the roof over your head is paid for and to end the constant monthly payments.   I think generally speaking paying off the house early is a good idea and should be pursued in a manner similar to the Dave Ramsey Plan. Mrs C. and I contribute 20% of our pay to retirement accounts before putting any extra on the house.   In some scenarios I have to side with Ric Edelman on taking out a mortgage, here is why.

 

 

Why Take Out a Mortgage in Retirement?

The thing is, having a job makes it relatively easy to borrow money.  When you don’t have a job, it isn’t so easy.  A mortgage really isn’t a loan against your property, it is a loan against your income.  It’s entirely possible to get a loan based off of 401K withdrawals and social security income, but you may have more options and the process will be easier while still maintaining a traditional job.

I think that this only makes sense for affluent retirees who have substantially more in invested assets then the proposed loan amount.  Wealth is about having options, and one option that may make sense is having a long term loan at an historically low interest rate. In order to increase liquidity, it may make sense for a homeowner to take out an 80% LTV mortgage before hitting retirement.

At current rates, a homeowner could take out a 30 year, $200,000 loan with payments of $950 a month, or $11,400 a year.  With interest rates on a 30 year mortgage being around 4%, which is also the ubiquitous “safe withdrawal rate” having the $11,400 conservatively invested could amount to a wash. The main difference is having access to the home equity vs. not having access to it.

Why Not a Reverse Mortgage?

This strategy is very different from a reverse mortgage.  With a reverse mortgage negative amortization occurs. The reverse mortgage is set up so that the borrower doesn’t make any payments on the loan at all, including interest.  These loans usually come with very high origination costs and higher than market rate interest charges.  A reverse mortgage may have its place in some very specific scenarios, but if it seems like this may be a good idea at some point, taking out a mortgage before retiring may be a better option.  Another option could be having a HELOC, but banks have been prone to cancel HELOCs and they typically come with variable interest rates.

Inflation Insurance:

The policy of the Federal Reserve for the past several years has been to print money, and quickly! Having a mortgage is a hedge against inflation. If large scale inflation, or god forbid, hyper-inflation occurs, the mortgage payment becomes almost negligible, of course cash assets may become completely worthless.  For people worried about inflation, having a 30 year low interest rate mortgage may be a reasonable hedge position.

 

Would you consider having a mortgage while retired?  Even if only as an inflation hedge?

John C. started Action Economics in 2013 as a way to gain more knowledge on personal financial planning and to share that knowledge with others. Action Economics focuses on paying off the house, reducing taxes, and building wealth. John is the author of the book For My Children's Children: A Practical Guide For Building Generational Wealth.

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