Is a fully paid-off home in retirement really worth it? Not for all US retirees — here’s why
Is a fully paid-off home in retirement really worth it? Not for all US retirees — here’s why
Retirees have more mortgage debt than ever before. According to a report from the Joint Center for Housing Studies of Harvard University, the share of homeowners ages 65 to 79 with a mortgage on their primary home increased from 24% to 41% between 1989 and 2022.
The amount of debt also increased, with the median mortgage balance rising from $21,000 in 1989 to $110,000 in 2022. That’s on an inflation-adjusted basis, with both amounts in 2022 dollars. Homeowners 80 and up saw an even sharper 750% increase during this time, as the median mortgage balance jumped from $9,000 to $79,000 among retirees 80 and over.
Carrying a mortgage into retirement means seniors need more money as their housing expenses are higher when they must send a payment to a lender. This may make it seem like all seniors should focus on paying off a home loan ASAP. However, that’s not necessarily the case. Here’s why.
There are some very obvious benefits to paying off a home before retirement, or ASAP after retiring.
Most notably, housing costs are a lot cheaper without a home loan. The same study referenced above found that older mortgage holders have median monthly housing costs of $1,470 compared with $520 for older homeowners without mortgages and $940 for renters. Paying less means less of your fixed income must go to your home.
However, there are some big downsides too. For one thing, every dollar that goes to paying off a mortgage early is money that wasn’t saved for retirement or that was taken out of a retirement account and is no longer earning returns. Tying up a lot of money in a home can be a problem since you can’t access your equity until you sell the property so you can’t live on this money.
Many older Americans also have mortgages at very low rates. In fact, more than half of all outstanding mortgages in the U.S. have rates below 4%, according to Redfin analysis. This is a fantasy number for today’s buyers who are looking at home loans in the 6% to 7% range. Retirees may not want to give up these ultra-cheap loans because they’d likely more than double their rate if they had to buy a new property.
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Based on these factors, the reality is that having a paid-off home loan can be a good thing for those who repaid their mortgage over their career on the normal schedule without compromising retirement savings. Seniors who had to buy a home recently at a very high mortgage rate may also want to prioritize debt paydown to avoid high monthly costs in retirement.
However, for those who have comparatively cheap loans lingering, paying off the house ASAP likely doesn’t make sense — especially as money can earn better returns in safe investments that produce income seniors can actually live off.
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If you are one of the many retirees who currently owe money on a home loan, you definitely don’t want to raid your retirement accounts to pay it off. Doing so could put you at risk of running out of money too soon by preventing you from maintaining a safe withdrawal rate. It could also trigger a huge tax bill as you withdraw a large sum from your accounts.
One of your best options to eliminate your loan is to downsize to a cheaper property — but only if you can sell the home you have to generate enough money to pay off your existing loan and buy your new property in cash. Otherwise, today’s higher rates could mean you may actually increase your costs, even if you buy a cheaper property.
If you don’t want to downsize and you have enough extra money coming in at a safe withdrawal rate, you can pay extra toward the principal over time if you want to pay your debt faster. A financial adviser can help you create a budget to do that, while still ensuring you don’t take too much out of your investments too soon so you have the funds for other necessities.
However, if you have a rate below 4%, there’s very little reason to do any of that. Instead, keep making your current payments, leave your money invested to earn returns, and wait until your property gets paid off on the normal schedule over time.
This article provides information only and should not be construed as advice. It is provided without warranty of any kind.
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