Paying Off Mortgage Doesn't Always Pay For Retirees

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Special Report:Race To Retirement

In earlier generations, the last thing someone wanted to face as he reached retirement age was a mortgage payment.

People tended to buy one home and stay in it for the long haul. When it came time to retire, they wanted to be free and clear of mortgage debt.

Not so anymore. You're much likelier to buy a starter home in your 20s or 30s, move up to a bigger place after a decade or so, then move up to your dream home in your late 40s or 50s.

Big House, Big Ideas

The result is that a lot of folks reaching retirement age face many more years of monthly mortgage payments.

For these people, it can be tempting to tap into savings and other investment accounts to pay off the mortgage and face one less monthly payment.

But does it make sense?

That depends on a variety of factors, experts say.

For many retirees -- especially those with a lot of consumer debt or inadequate savings -- it's better to keep paying the mortgage and put your cash to other uses.

This is particularly true on mortgage loans with low interest rates.

"It depends on how many other financial priorities you have crossed off the list," said Greg McBride, senior financial analyst at "If you do not have an adequate savings fund, or have a lot of high-interest debt, that takes priority over paying down the mortgage."

One problem is that a lot of retirees in the 21st century are "short on liquid assets but long on home equity," McBride said.

He added: "Accelerating your payments on the mortgage is only going to exacerbate that situation. It does not make sense from the standpoint of financial planning and flexibility."

Christine Benz, director of personal finance at Morningstar, says retirees should tap into investment accounts to pay off a mortgage only if they have enough cash available to pay off two years worth of living expenses.

"It's definitely a balancing act," she said. "If prepaying the mortgage will reduce your liquidity to under six months to a year in cash for living expenses, I would argue against paying it off."

The better strategy for most people is to accelerate their mortgage payments rather than try to pay off the whole thing at one time, she says.

She points to retirees who have benefited from robust stock market gains the past four years.

"One idea would be to take some of your proceeds and move them into a mortgage pay-down," she said. "The money doesn't necessarily have to come out of your cash accounts, but out of other parts of your family portfolio. You might just decide to double up your payments to accelerate the pay-down."

Yet some retirees don't have enough money saved up from investing .

They might've gotten hurt during the financial meltdown of a few years ago -- selling off their investments in a panic and not benefiting from the recovery.

Others simply spent too much money on other things.

"A lot of boomers are liquid poor," McBride said. "It's not just a function of the last couple of years -- it's a function of a lifetime of overspending and undersaving."

More Money

To access more cash, many of these retirees have turned to second mortgages available to home owners over 62 years old. Second mortgages let homeowners tap into their home equity to pay off other debt.

"Second mortgages are going to be a lifeline for millions of baby boomer retirees who have not saved sufficiently for their retirements but have managed to accumulate a significant stake in home equity," McBride said. "It will be a useful tool for them."

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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