Wednesday, August 12, 2015

Mortgage, No Mortgage, Reverse Mortgage or Rent?

Once you decide where you wish to live during your retirement, you need to consider how you will pay for your residence.  There are issues to consider no matter what you decide, and this article will give you an overview of some of your choices.  You might decide to get a traditional mortgage on your home, just as you have done during your working years. You could choose to pay cash for the home with savings or the equity from the last home you sold prior to moving into your retirement community.  You might decide to stay where you are and use a reverse mortgage to pay off your current debt and fund other retirement expenses.  Finally, you could choose to invest the proceeds of the last house you owned, and rent your retirement home.

Pros and Cons of Having a Mortgage on Your Retirement Home

*  Advantage: You can use the mortgage interest deduction to reduce the amount of income taxes you will pay.  This is especially useful for people who expect to pay high taxes, especially now that they will no longer have other types of deductions, such as business expenses.

*  Advantage:  Money that would have been put into a home, could be channeled into investments that would increase your income, instead.  This gives you the double advantage of increased tax deductions and increased retirement income.   This option is best for high net worth people with a large tax liability, who want to maximize their deductions.

*  Disadvantage:  Some people do not want to carry debt during their retirement.  It can cause them to experience additional stress and worry, especially if their finances are very tight.  They worry that something could happen to their investments and they would be unable to pay off their home.

Pros and Cons of Paying Cash for a Retirement Home

*  Advantage:  Many people feel more comfortable knowing that their home is paid off and they will have an inexpensive place to live, as long as they can pay the property taxes and insurance.

*  Advantage:  Many lower income retirees in moderately priced homes would not receive enough of a tax deduction to enable them to lower their tax liability more than if they simply filed using the standard deduction.  In fact, there is no tax benefit for some people who have a mortgage.  On the other hand, not having a mortgage makes them feel more financially secure.

*  Disadvantage:  When people pay cash for a home, most of their assets will be tied up in their house, which makes it more difficult for them to come up with cash in an emergency.  You do not want to pay cash for a house if it will use up all your cash assets, leaving you without any reserves.

Pros and Cons of Getting a Reverse Mortgage

*  Advantage:  People with a lot of equity in their home can use a reverse mortgage and use the money to pay off their traditional mortgage and/or use their home equity for other retirement expenses. 

*  Advantage:  You do not have to make payments or re-pay an reverse mortgage until you die, sell the home or move out.  If a couple lives in the home, however, it is important to make sure both of their names are on the reverse mortgage so that the loan does not have to be repaid until both of them have died, moved or decided to sell.

*  Disadvantage:  The equity in your home could be used up during the early years of your retirement, especially if you get the reverse mortgage soon after retiring, leaving you without an asset you can tap into during your later years.

*  Disadvantage:  You may not have any inheritance to leave your children.

Pros and Cons of Renting Your Retirement Home

*  Advantage:  Renting allows you to invest your savings and the proceeds from the sale of your last home in stocks, bonds, mutual funds or annuities, to maximize your retirement income.

*  Advantage:  Renters have the flexibility of quickly adjusting to changes in their financial situation or medical condition.  For those with serious health concerns, renting can make it much faster and easier to move into assisted living or a Continuing Care Retirement Community.  Upon death, it is often easier to probate the estate.

*  Advantage:  Renters in some areas may be able to pay far less in rent than they would in house payments.

*  Disadvantage:  Renters do not have the opportunity to participate in the increased equity they could receive during periods of real estate inflation.  They have to hope that this disadvantage is offset by rising values in their investments.

*  Disadvantage:  Renters who have investments may tap into them too easily, if they are not disciplined. This could lead to a decrease in their income later in life.

*  Disadvantage:  Renters do not have the advantage of reducing their income taxes by using the mortgage interest deduction.  They have to accept the standard deduction.  However, if their taxable income in low, a mortgage deduction may not be helpful to them, anyway.  This is often true for people who have most of their retirement assets in a Roth IRA or tax-free bonds, for example.

Bottom Line:  As you can see, there are advantages and disadvantages no matter which choice you make.  You have to know yourself.  Will you be more comfortable knowing that you own a house that is paid for?  There is a lot of value in that kind of peace-of-mind.  Or, would you feel more secure knowing that your money is invested and you have maximized your retirement income?  Do you feel comfortable with the idea of getting a reverse mortgage when the time comes that you need extra cash?  Would you like the flexibility of renting your retirement home?  Only you can decide which option will work the best for you.


"Cash vs. Mortgage? Here's How to Decide" by Marc D. Allan, Where to Retire Magazine, January/February 2015, pg. 32.

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