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I’m planning a new home build as I head into retirement, and I’m considering carrying a mortgage and keeping the payment at no more than 18%-20% of my total retirement income floor, with a term of 10 years or less (with an early payoff).
For those who’ve done something similar (or chose not to), does that sound like a reasonable plan in real life—and what should I stress-test or watch out for?
Jeff
My mortgages have increased in retirement. My residence has a very low interest mortgage that has 10 more years to run. I live in a rural area and over time I have purchased parcels surrounding my residential acreage. The most recent purchase filled in a hole between 2 other parcels. I had enough equity holdings to pay for it, but decided against the tax consequences of liquidating highly appreciated stock. After much research I transferred stock to a self-directed account that allowed for a portfolio line of credit, now at 4.64%. (It adjusts with the Effective Federal Funds Rate “EFFR”). Because I hold the property as an investment, I can deduct the interest. I plan to pay off my loan when I dispose of a different parcel in a couple of years. If I were to die before completing my financial and real estate maneuvers, my appreciated stock can more than cover my mortgage debts. That being said, I still experience worry when making large purchases and hope to be mortgage free in 10 years.
I’ve always seen mortgages as a personal finance decision, and the keyword there is personal. I preferred keeping the mortgage and investing the money for higher returns instead of paying off low-interest debt. My wife disagreed—she wanted it gone. We paid it down, and honestly? I’m really happy we’re mortgage-free now.
The discussion is good, but the focus has been all about the financial aspects of the decision. There’s also a behavioral or, if you will, emotional aspect to the decision. For us, we derived a lot of comfort from owning a home debt free as retirement approached. And in retirement, we also appreciate the simplicity of being debt free. Being in my mid 70s, simplicity becomes increasingly important.
I paid my mortgage off when I retired in 2000. I had refinanced to 15 years (at 7.75% from 10%) in year three, and made extra principal payments. The balance was around $12,000 or $15,000, I think. If I had had a mortgage payment I would not have retired that early. I lived in that house “rent” free for another twenty-plus years.
We built our house and took a 2.65% mortgage almost 5 years ago. Our combined mortgage payment, insurance and property taxes amount to about 10% of our income. Sleep very well at night.
For all those with mortgages in retirement or planning to have one, have you considered the possible impact if one of the partners passes leaving the surviving partner to pay the mortgage, perhaps on reduced income?
Our pensions all have 100% survivor benefits and COLAs, so there will be no reduction in income when one of us passes. Once we start drawing Social Security, obviously that changes. But the built-in pension income gives us a lot of security in this regard.
Great question.
Yes, that is something I have put into my plan. The mortgage will fall well within the income floor of each of us. I also have life insurance that could pay off the mortgage. I also have Survivor Benefit plans in place from my pensions to increase my wife’s income floor if I pass before she does.
The life insurance is a great plan. If we were getting a new mortgage, I’d take out a policy big enough to pay that off.
Good planning.
If we’d bought our house with cash in 2021, that money would now be sitting inaccessibly in the walls and roof instead of in our retirement accounts, where it has grown beautifully while the house value has remained static. I will continue to pay my 3.25% fixed mortgage with cheaper and cheaper dollars as the years go on. What’s not to like?
Yep, 💯. We spent a lot of years having most of our net worth tied up in our house. I don’t want to go back to that.
We took out a $50K mortgage when we built our retirement home a few years before retiring. We had paid off our mortgage for several years and that was the furthest I would go into debt. As soon as we could we changed the mortgage to a home equity line of credit so we could pay it off as we wished. Was making steady progress on paying it down when both my parents passed away and we unexpectedly inherited some money and then paid off the balance.
In my financial reading I discovered that it is recommended that when retiring to have a HELOC for financial flexibility.
My plan is when we turn 70 and claim Social Security we will tear down our deck and replace it with a three season porch with a small propane fireplace. At that time we will have an income source (other than my small pension) to qualify for a HELOC. We have budgeted $10K per year to pay it off, but have the flexibility, if needed, to put our substantial annual travel budget to pay it off sooner. I have decided on this plan in order to avoid a spike in income which might push our top tax rate greater than 12% and possibly incur IRMAA payments. Right now we are living off our retirement accounts until we turn 70 so really don’t have an “income source”.
You certainly thought it out, but from my perspective there are a lot of what if possibilities that personally I could not deal with. The idea of any debt in retirement scares the heck out of me.
Instead of debt why not use your travel budget to build the porch now and call it leisure travel?
My leisure budget wouldn’t make much of a dent in what I am guessing the cost might be. Plus most of our international travel will be in the next 5-10 years. I already lost one year of travel due to taking care of my mother in law, which I don’t regret, so I’m not willing to postpone it any longer.
I have an amount saved for what might be half the cost, while the plan with the HELOC half is budgeted for pay off within five years. Of course this will be subject to the final estimate.
We refinanced during Covid at 3% fixed for 30 years. We were 68 at the time. Our mortgage payment is 11.3% of our annual gross income. Our income is mostly passive real estate income, averaging 6% distributions, (mostly tax free), plus Social Security and interest. Although we could pay it down fast using RMDs from IRAs, we will never pay it off early as I feel we will never see 3% mortgages again. Plus we would rather use our RMDs for QCDs to charities each year.
I agree. The currency is being debased at about 6% or more, inflation is around 3% (or so the Fed says), so why pay it off?
We have a 3.125% mortgage that we obtained in 2020, so we still have a long way to go. We felt (and still feel) fine about that because of the low interest rate and because we’re fortunate to have a good deal of locked-in retirement income (pensions and in a few years, Social Security). At some point we might just take a chunk of money and pay it off just to add more monthly flexibility, but that’s not a financial priority for us at this point. We have no other debt.
I think if your monthly income is adequate and you can manage the mortgage without stress, it’s fine.
We like being debt free in retirement. Our last mortgage was a 10 year like you are planning to get. My spouse made an amortization schedule that was interactive and I added extra payments we made to it from things like bonuses and tax refunds, etc. It was amazing how quickly the principal went down. We paid it off in 3.5 years.
I don’t know what your other assets are and if you could do something like this or would want to with unexpected $$, dividends, etc. I am just offering as a thought exercise for you. We were in the last 10 years of working when we did this. Good luck. Chris
I retired 6 years ago. Had a mortgage left on my house and kept it. Now down to the end but I’m glad I did as it was @ 2.75% and my $ was better used elsewhere. Best of luck to you.
Not an answer, but a thought – consider a 30-year mortgage instead if you can get a similar effective interest rate (points and sneaky fees included). Make sure it has no early payment penalties.
Then make the same payments you’d be required to make for the 10-year loan. You’ll pay the exact same interest and the loan will be paid off at the exact same time as the shorter loan. If hard times hit you can back off to the lower 30-year payments for a while and nobody will fuss.
That is exactly what I was going to say. I have preached to my children that in any large financial decision always do what provides you with the greatest financial flexibility
Langston,
That’s a really smart point, and I like the flexibility angle. Running a side-by-side comparison, and if those boxes check, I can see that being the best of both worlds.
Thanks,
Jeff
How exciting! Here are some things to think about as you mull over it:
Thanks Mark!
I’m modeling exactly that “30% drop + flat for a decade” scenario, and the house has to work on income, not market luck. The mortgage would be ≤18% of total retirement income and 10 years or less, and I’m budgeting maintenance as a real line item (even for a new build) plus a separate “nest feathering” bucket for the inevitable blinds/landscaping/fencing/furnishings—funded after the emergency fund and reserves are set. If markets are ugly, the extras pause.
On living expenses and shocks: the plan leans on guaranteed income (pensions/SS) to cover baseline spending so we’re not forced to sell investments in a down decade, with cash/reserves to absorb a healthcare or spending spike. I’m also looking at survivor impact—making sure the house isn’t a burden if I die early—and stress-testing property tax/insurance inflation so rising home costs don’t ambush the budget.
Thank you for the feedback and thoughts.
Jeff