Conventional wisdom dictates that retiring with debt (especially debt as large and significant as a mortgage) is financially risky at best and potentially ruinous at worst.

Brian Lindmeier doesn’t see it that way. “It just doesn’t make any sense to pay for the house,” he said.

Lindmeier, 80, a retired purchasing and inventory manager, and his wife, Cindy, who retired from the local public school system, refinanced their home in Orange, California, in late 2020. They transferred their balance to a new $30 loan. years and cut its interest rate in half to a rate below 3 percent. Lindmeier called the measure “obvious.”

“The money I would have to take out of my savings or investments is generating higher interest than the interest I am paying on the loan,” he said.

For a growing number of older Americans, taking out a mortgage that is likely to outlive them makes financial sense. A significant percentage of homeowners have fixed-rate mortgages with historically low rates. According to online real estate brokerage Redfin, about six in 10 mortgage borrowers in the third quarter of last year had loans with interest rates below 4 percent. Nearly a quarter had rates below 3 percent.

A campaign of rate hikes by the Federal Reserve, aimed at curbing inflation, has pushed the yields investors can earn on ultra-safe instruments such as certificates of deposit to 5 percent or more.

Even those who have spent years saving with the intention of paying off their mortgages with a lump sum in retirement now find themselves recalculating. Some are determining that those funds would be better used earning returns on other investments or helping them meet their cash flow needs for everyday expenses.

Eric Zittel, chief lending officer at Financial Partners Credit Union in Downey, California, said several of his members, including Lindmeier, are keeping their mortgages and cash.

“They’re realizing they can get a 4.5 to 5 percent rate just on a CD. When you do the math, it makes a lot more sense for them to hold on to those funds.”

Several financial advisors and retirement planners argue that the imperative to pay off a mortgage before retirement is an outdated axiom in the current economic climate.

“While paying off debt seems like a very conservative and safe move, trading your liquidity for a paid-off mortgage is quite risky,” said Evan Beach, president of Exit 59 Advisory, a wealth management firm that focuses on income planning for retirement in Alexandria, Va. “You’re giving up money in your pocket that you might actually need for something else.”

Gary Jacobs, a client of Mr. Beach and a retired federal employee, and his wife, Donna, a retired nurse, refinanced the mortgage on their home in Chevy Chase, Maryland, in late 2021, when mortgage rates were at a record high. channel.

“Timing is everything, and this time we got it right,” Jacobs, 79, said. Refinancing to a new 30-year mortgage at a rate about half their previous interest rate reduced the couple’s monthly payment by about $300.

“Although we could have, we didn’t feel like tapping into our cash reserves to pay the mortgage,” Jacobs said, adding that paying the mortgage would have used up about half of their savings. “We are conservative in the sense of wanting to be prepared for eventualities where we may need the cash.”

This dynamic is a factor driving historically large percentages of older Americans to accumulate mortgage debt into old age, according to a new report from the Joint Center for Housing Studies at Harvard University. In 2022, researchers found that just over 40 percent of homeowners age 64 and older had a mortgage, up from about 25 percent a generation ago.

Ultra-low mortgage rates were a big driver of the increase, said Jennifer Molinsky, project director of the center’s housing and aging society program. “We think that for some people, there is a calculated financial decision that they would prefer to keep their mortgage, even if they could pay it off, and invest it elsewhere,” she said.

But Molinsky expressed concern that the increase would come in tandem with an overall rise in debt burden among seniors. “There is a trend among all seniors that there is a higher level of debt across the board,” he said.

Retirees on fixed incomes may have difficulty managing higher-interest and variable-rate debt, such as outstanding credit card balances. In the worst-case scenario, if a health crisis or the death of a spouse destabilizes their life or finances, older Americans could be at risk of losing their homes.

“For a low-income senior, homeownership can sometimes become a challenge, because as people enter their retirement years, they often see a decline in their income,” said Lori Trawinski, chief financial officer. and employment from the AARP Public Policy Institute.

While the recent rise in home prices has given homeowners more value on paper, this can pose a challenge for those on fixed incomes, as those higher valuations can lead to property taxes and insurance premiums. Taller.

Some senior finance and policy experts point out that because a mortgage is almost always the largest component of a homeowner’s monthly expenses, homeowners in their 50s and 60s have less resilience to absorb a financial hit like a loss. unexpected work or care demands.

“Housing is the biggest part of that budget for everyone, so it’s certainly more expensive month to month to have a mortgage than it is to have a house that’s paid for,” said WE Upjohn researcher Beth Truesdale. Employment Research Institute.

While people may intend to stay employed until they can get Social Security, Truesdale said, his research indicates that only about half of American workers stay employed into their 50s. This suggests that an income-reducing event is more common than many people expect. While the decline in labor force participation is steepest among women and less-educated workers, the employment rate drops about 20 percentage points across all demographic groups for people in their 50s.

“Even for people who start with benefits, there’s no guarantee they’ll be able to work as long as they want,” Ms. Truesdale said.

For those who own their homes free and clear, the Joint Center for Housing Studies found that older Americans often struggle to tap into the equity in their homes. And those homes may not be as valuable as their owners believe. AARP’s Trawinski said longtime homeowners might be content to live with, for example, outdated kitchens or bathrooms.

“It often happens that people don’t make those kinds of updates,” he said. Older homeowners may also have mobility limitations or other physical challenges that make the maintenance and upkeep of a property more challenging.

Low-income senior homeowners, who are likely to be people of color, are also more likely to have difficulty paying for needed repairs and improvements. “There is less ability to invest in that property and maintain it over time,” said Molinsky of the housing studies center. “People need to maintain the value of that asset if they want to use that capital in the future,” but, he added, maintenance can involve significant costs.

The effect that housing costs can have on the average household budget can lead some people to view a mortgage as a risky obligation to carry into retirement, in some cases, whether that concern is justified or not, said David Frisch, founder of Frisch Financial Group. in Melville, New York

“In addition to the financial calculations, it’s also psychological in terms of risk,” he said, adding that even when the math suggests that maintaining a mortgage would cost less than paying it off, some homeowners’ intense aversion to debt influences their decisions. “Some people don’t want their mortgage payment hanging over their heads even though they’re earning more” by keeping that cash in certificates of deposit or Treasury securities, he said.

Some financial planners also adopt the philosophy that less debt is better. Jamie Cox, managing partner at Harris Financial Group in Richmond, Virginia, said a homeowner’s psychological approach to debt plays a role in his reluctance to encourage a client to keep a mortgage.

During the financial crisis, Cox said, his clients with paid-off mortgages were more optimistic about their portfolios declining because they didn’t have that obligation hanging over their heads. “They are better investors because they are not afraid of losing their homes,” he said.

There’s no one-size-fits-all decision that works for everyone, so financial planners suggest homeowners who are retiring or nearing retirement consider the specifics of their mortgage terms, cost of living and risk tolerance. , along with the following points:

  • If you took advantage of historically low rates to refinance, you may be able to earn a higher return by keeping your mortgage payment money in safe investments like certificates of deposit (CDs) or Treasury bonds.

  • Financial advisors warn against paying off a mortgage if doing so would leave you with little or no emergency savings. Advisors typically suggest maintaining an emergency fund that covers three to six months of living expenses in cash or similar liquid instruments.

  • Your personal risk tolerance is important. Saving a few hundred dollars a month shouldn’t cost you your peace of mind.