For Retirees, a New Mortgage Might Just Work Out

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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.

But what if conditions change? While your mortgage rate would be fixed for 30 years, CDs, Treasury securities or other safe investments may someday be more generous. If you took the mortgage, your cash would be available when better opportunities arrived, and if they didn’t, you could use the cash to pay the mortgage off early, eliminating all future interest charges. With mortgage rates this low, it wouldn’t cost much to take a chance.

Of course, some homeowners may want to borrow so they can use their cash to buy stocks, hoping for really big returns. That would make sense only if you could handle the worst case, a loss on your stocks.

Unfortunately, it can be difficult to get a mortgage in retirement. Before the financial crisis, it was possible to get a loan based on investments and other assets even if you had little income. Now retirees generally must satisfy the same income requirements younger borrowers do.

Lenders want to see dependable income sources like Social Security, a pension or annuity income. Lenders aren’t as comfortable with uncertain income like stock and mutual fund dividends, or pay from a part-time retirement job.

Anyone tempted to take on a mortgage in retirement should think about the long term. The longer you’ll stay in the home, the better the odds it can eventually sell for enough to cover your debt. With housing prices still falling in many places, or threatening to, a homebuyer with a short horizon could be underwater when it comes time to sell.

If you're thinking of buying a house or apartment, check out MainStreet's look at where buying is cheaper than renting!

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