Retiring With a Mortgage: Are You Flushing Income Down the Drain?

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If you’re like many retirees, you may have refinanced in the last few years to take advantage of insanely low interest rates. But is retiring with a mortgage payment a good idea? Or is it just flushing your hard-earned retirement income down the drain? 

More Homeowners Are Retiring With Mortgage Payments

According to a 2023 Harvard University study, the share of 64- to 79-year old homeowners with mortgages increased from 24% to 41% between 1989 and 2022.

For homeowners aged 80+, the share increased from 3% to 31% over the same time period.

The data is pretty clear: a lot more homeowners are carry mortgages into retirement than in the past. And, unfortunately, with the cost of living rising, mortgage payments can be a big financial burden.

Many retired homeowners with mortgages refinanced to take advantage of the insanely low interest rates during the pandemic. Many chose 30-year mortgages because of the relatively low payments.

That’s not a bad choice, but here’s the kicker: when does that loan pay off? Does it make sense to keep that mortgage payment if you have other options?

You could spend the rest of your life paying on that mortgage and still never pay it off. If you have no plans to sell your home, that may not make a lot of sense.

Is there a better option? Yes, there is! And it’s called a home equity conversion mortgage, or HECM. We’ll explain how the HECM works and then demonstrate with a case study how it can be a great option for many retired homeowners.

How a HECM Works

A HECM is a unique home loan that enables homeowners 62 and older to eliminate their mortgage payment without giving up ownership of their homes.

No monthly mortgage payments are required as long as at least one borrower (or non-borrowing spouse) lives in the home and pays the required property charges.

You retain title ownership of your home and you’re free to leave it to your heirs. Your heirs will inherit the equity remaining in your home.

The HECM is a mortgage, so it has an annual interest rate like any other mortgage. Rates are typically comparable to traditional 30-year mortgage rates. Any unpaid interest simply accrues onto the loan balance over time.

By leveraging the equity in your home to eliminate your mortgage payment, you free up cash that you can use for other things: home improvements, add to savings, travel, or do fun things with your grandchildren.

To see how this works, let’s look at an example based on real-life scenarios.

Case Study: Draining An IRA to Pay a Mortgage

Let me introduce Alice (a fictional person), a 68-year-old widow living on Social Security, a small pension, and the IRA she built up over many years of working in the banking industry.

Alice’s Social Security and pension don’t quite cover all of her expenses, so she’s withdrawing $800 per month from her IRA to cover the shortfall.

Alice is relatively comfortable, but she acknowledges that she doesn’t have a lot of wiggle room in her monthly budget. She refuses to splurge on home improvements or travel because she knows it will drain her IRA faster.

She wants to make sure the IRA lasts at least as long as she does.

Alice enjoys her home and has no plans to sell anytime soon. She’s also not worried about leaving her home to her kids because they all have their own homes and are doing well.

Alice has a 30-year fixed mortgage that she’s paid on for the last four years. The starting loan amount was $150,000 and the interest rate is 3.75%, which means her principal and interest payment is $695.

Alice has a low interest rate and mortgage payment, but she’s essentially draining her IRA (and paying income taxes on the withdrawals) to pay the mortgage.

Even worse, she’s got twenty-six years left before her mortgage is paid off. She’ll be 94 when she makes her last mortgage payment.

Alice thinks she may last that long, but it’s a sure bet her IRA won’t. She’s worried about running out of money.

For Alice, retiring with a mortgage payment means essentially flushing her hard-earned retirement savings down the drain. She’s draining her IRA (and paying taxes on the withdrawals) to pay on a mortgage that she may not live long enough to pay off anyway.

There has to be a better way, right? Fortunately, there is!

Eliminating A Mortgage Payment

Alice is concerned about running out of money, so she decides to check into a HECM. If she can eliminate her mortgage payment, she’ll free up cash for fun things and help preserve her IRA for longer.

Based on a home value of $375,000, Alice learns that she qualifies for a HECM principal limit of $159,750 with an interest rate of 5.32%. With the 0.50% annual mortgage insurance included, her total interest rate is 5.82%.

Once her mortgage and closing costs are paid, she’s left with $7,700 that she chooses to allocate to a growing growing line of credit.

The HECM eliminates Alice’s $695 mortgage payment and gives her an extra reserve account (the line of credit) for unexpected expenses, such as home repairs or medical bills.

More importantly, Alice can now stop drawing down her IRA to pay a mortgage payment. This helps preserve her IRA for longer and reduces her income tax bill.

Alice is ecstatic that she’s no longer stuck with a mortgage payment. She can rest easy knowing that her retirement savings will last for a long time to come.

How Things Look In Ten Years

Now, let’s jump ten years into the future to see how things are going for Alice.

Assuming rates don’t change and Alice doesn’t tap into her line of credit, the HECM balance will have grown to $287,972. Her available line of credit will have grown to $13,761.

As you can see, Alice’s loan balance has grown substantially in the ten years since she’s had the HECM. She’s added almost $136,000 to her loan balance.

At first glance, that might sound like a bad thing, right? But let’s not forget that Alice hasn’t made a mortgage payment for ten whole years. Her total cumulative mortgage payment savings is a whopping $83,400.

That’s $83,400 she’s been able to spend on home improvements, travel, and spending time with her grandchildren.

More importantly, that’s $83,400 that she didn’t have to drain from her IRA. That means she’s preserved her retirement savings for longer, reduced her income taxes, and created peace of mind that she’ll be financially secure for years to come.

Risks of Retiring With a Mortgage

The HECM is a great product, but it’s not always the perfect solution. If you have abundant income and financial reserves and your mortgage payment isn’t a burden, it might make sense to just keep your mortgage payment.

However, don’t forget that financial circumstances can change. Just because you can easily pay your mortgage now doesn’t mean it will be as easy in the future. Here are some things to think about:

  • Loss of income – If you’re married, do you get to keep your spouse’s income if he or she passes away? When one spouse dies, you typically lose the lower of the two Social Security checks. Also, many pensions don’t transfer to a surviving spouse. Can the surviving spouse remain in the home and comfortably pay the mortgage payment? Or, are they at risk of losing the home?
  • Future cost of living – You may be able to comfortably pay the mortgage payment now, but what about in ten years when the cost of living increases? What if your property taxes and homeowner’s insurance increase? Will your income keep up with inflation?
  • Future big ticket expenses – As you get older, you may have more medical bills. What about future home maintenance and repairs? Do you have savings to cover big ticket repairs and maintenance such as a new roof, A/C, furnace, etc.? If not, can you build up adequate savings while paying a mortgage payment?
  • Draining a retirement account to pay your mortgage – In my opinion, this is a biggie. This is what the above case study was all about. It typically makes no sense to pull money from your retirement account to pay on a mortgage that could outlive you. This is especially true if you’re paying taxes on your withdrawals. If you’re draining your retirement account to pay on a mortgage that has decades left to go, you need to eliminate your mortgage payment immediately, in my opinion.

Remember, if you can’t afford your mortgage payment at some point, you could be at risk of losing your home.

Reasons for Keeping Mortgages Into Retirement

I’ve worked with a lot of retirees over the years and I’ve heard a variety of reasons for keeping a mortgage in retirement. I’d like to offer some feedback on the most common ones.

To be clear, I’m not criticizing or saying the following reasons are wrong. Everybody’s situation and goals are different. However, I have lot of years of experience with this stuff under my belt. I just want to give you a few things to think about.

Here are some of the most common reasons I hear for keeping a mortgage into retirement:

I have a low interest rate”

Yes, you may have a low interest rate, but you also have a monthly payment that is costing you every month. If the monthly payment isn’t a burden and it’s not inhibiting your financial security or lifestyle, it probably makes sense to keep it.

However, if the monthly payment is a burden and is limiting the enjoyment of your retirement, it could make more sense to get rid of it.

“I can deduct the interest on my taxes”

It’s tougher to write off mortgage interest than it used to be because of the low rates during the pandemic. A lot of homeowners with mortgages don’t pay enough interest to itemize it on their taxes.

Besides, even if you can write off your mortgage interest, you’re essentially paying a dollar to get back thirty cents. In my opinion, it typically doesn’t make sense to keep a mortgage into retirement just for the interest deduction.

“I’m building equity in my home”

If your goal is to leave as much equity as possible to your heirs, then this can make sense. Obviously, you don’t want to extract equity from your home if your goal is to build equity.

However, it’s important to keep things in perspective. Home equity is subject to uncertainties in the real estate market. You could bust your tail for ten or fifteen years paying down your mortgage only to lose the equity you’ve built up when home values go down.

Also, if you refinanced in the last few years, you’re likely building very little equity for the amount you’re paying every month.

To show you what I mean, let’s look at an example. Let’s say you take out a $250,000 30-year fixed mortgage at 4.50%, which has a principal and interest payment of $1,266.71.

The table below shows how much principal you’ll pay down over the coming years.

Years PaidTotal Payments MadeTotal Principal Paid
3 Years$45,601.56$12,663.55
5 Years$76,002.60$22,105.21
10 Years$152,005.20$49,776.41
Does keeping a mortgage into retirement make sense? Not always! You pay a lot in payments and get relatively little equity in return during the first ten years of the loan.

As you can see, you pay a lot and get relatively little equity in return. After a full ten years of payments, which cost over $150,000, you’ve only pay down 20% of your original loan balance.

For the typical 30-year mortgage, it can take as long as nineteen or twenty years to just pay your loan down by half.

For many homeowners, it could make more sense to eliminate the mortgage payment and put the savings in the bank for your heirs. This is especially true if real estate values in your area are declining, anyway.

Retiring With a Mortgage Payment is Not Inevitable

Folks, retiring with a mortgage payment is not inevitable. It’s not inevitable to spend the rest of your retirement years throwing money at a mortgage that may outlive you. The HECM is a fantastic program that can get you out of “jail” early. The HECM is not perfect for everybody, but it’s a fantastic solution for many.

If you have a lot of years left on your mortgage, the HECM can get rid of the payment years (or decades?) early. That frees up cash for more important things, such as grandchildren, travel, and home improvements.

If you’d like an estimate of how much you can get from a reverse mortgage, check out our reverse mortgage calculator. If you’d like more detailed information about how a reverse mortgage works, check out our article on reverse mortgage requirements.

Mike Roberts Avatar
About Mike Roberts

Mike Roberts is the founder of MyHECM.com, a published author, and a highly experienced mortgage industry veteran with over a decade of mortgage banking experience. When he's not working, he enjoys spending time with his family, skiing, camping, traveling, or reading a good book. Roberts is the author of The Reverse Mortgage Revealed: An Industry Insider’s Guide to the Reverse Mortgage, which is available on Amazon.