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44% of Homeowners 62 and older still have a mortgage
According to the most recent data, about 44% of Americans aged 62 and older still have a mortgage payment. This percentage has increased over the past few decades, reflecting a trend where more older adults are carrying mortgage debt into retirement. Is carrying a mortgage into retirement truly a trap? Today, let’s examine when making mortgage payments is not detrimental and when it unnecessarily undermines one’s quality of life in their non-working years.
For decades conventional retirement planning assumed retirees would pay down their mortgage and retire mortgage-free—a great strategy if retirees avoid financial shocks or unexpected interruptions of income or suffer investment losses. But then life happens. Then what?
USA Today reports the share of Americans ages 75 and over who are carrying mortgage debt has risen steadily for decades, according to the Federal Survey of Consumer Finances: from 5% in 1995 to a historic high of 25% in 2022. Not only has the number of older Americans carrying mortgage balances increased, but so has the median mortgage balance. The survey reveals median mortgage balances for homeowners 75 and older have grown from $14,000 in 1995 to $102,000 in 2022.
According to the 2019 American Housing Survey (AHS) conducted by the U.S. Census Bureau, the median monthly housing cost for homeowners aged 75 and older was approximately $500, which includes mortgage payments, property taxes, insurance, utilities, and maintenance. However, many have a much higher payment having refinanced their home one or more times.
The Michigan Retirement and Disability Research Center at the University of Michigan found the typical retiree lacks the funds to cover their mortgage debt. That is highly problematic as researchers found retirees with larger mortgages face increased financial peril. Households with more mortgage debt tend to postpone retirement and spend less money once retired, Why are so many retirees still paying a mortgage? Recent data from the National Association of Realtors may hold the answer. It shows the typical first-time buyer last year was 35, while the average repeat buyer was 58. Baby boomers appear to be more comfortable taking on mortgage debt in later life than their older counterparts
When does having a mortgage in retirement make sense? When carrying a mortgage doesn’t put a strain on monthly cash flow to cover monthly payments and there are few other debts. “It’s always a function of cashflow,” said Erika Safran, a certified financial planner in New York. Fortune.com notes those who purchased or refinanced a mortgage in a low-interest-rate environment may want to keep their mortgage in place and invest their money. Stock market returns averaging 6.5-7% would exceed the 3-4% accrued interest they would save by paying off the loan.
However, there are several instances where eliminating a mortgage makes sense. Homeowners with a considerable amount of non-mortgage debt may find relief in eliminating their mortgage payments. Also, those facing a potential reduction in household income from a pension or Social Security after the death of a spouse may want to consider reducing their monthly debt burden. “We can’t predict the future and never know when the unexpected could happen. Therefore, it’s important to plan for the worst-case scenario and determine whether you’ll be able to pay for your mortgage during those times. If funding one would be a challenge for you, then you shouldn’t carry it into your retirement”, says Courtney Myers, a financial advisor with Thrivent Financial.
All this brings us to how one may eliminate mortgage payments. The first is to sell and downsize. If the homeowner has substantial equity in a large home they may be able to purchase a smaller home with a much lower mortgage payment. Another option is to sell and rent- an unpopular choice for homeowners who’ve enjoyed the security of fixed housing costs.
But what about reverse mortgages? The University of Michigan’s research only mentions reverse mortgages once. “The lack of a robust market for reverse mortgages and restrictions on home equity loans and lines of credit make it difficult to eat one’s house”. That’s it. No examination of the improvement to a reverse mortgage borrower’s cash flow or peace of mind in retirement. J. Mark Iwry, a nonresident senior fellow at the Brookings Institution told USA Today, that this omission “begs the question, what about reverse mortgages, and why aren’t they a reasonable part of the solution?” One suggested answer was ‘persistent reputational issues with the loan- a point USA Today drove home in its 2019 expose on reverse mortgages.
So here we have a top-tier university research department examining one of the pivotal questions of retirement that don’t fully explore all options for eliminating one’s mortgage payment in retirement. Such an approach while perhaps avoiding criticism from fellow academics falls short of providing a full analysis of all the options older Americans presently burdened with a mortgage payment may have.
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Shannon Hicks
Editor in Chief: HECMWorld.com
As a prominent commentator and Editor in Chief at HECMWorld.com, Shannon Hicks has played a pivotal role in reshaping the conversation around reverse mortgages. His unique perspectives and deep understanding of the industry have not only educated countless readers but has also contributed to introducing practical strategies utilizing housing wealth with a reverse mortgage.
Shannon’s journey into the world of reverse mortgages began in 2002 as an originator and his prior work in the financial services industry. Shannon has been covering reverse mortgage news stories since 2008 when he launched the podcast HECMWorld Weekly. Later, in 2010 he began producing the weekly video series The Industry Leader Update and Friday’s Food for Thought.
Readers wishing to submit stories or interview requests can reach our team at: info@hecmworld.com.
1 Comment
What is even more chilling? The IRS in its Publication 936 tells taxpayers that reverse mortgages are different so different, that you cannot deduct the interest, ever if you PAY it and it is acquisition indebtedness. What kind of bias is that? Here is what they wrote on Page 5 in their principal guide on the deductibility of home mortgage interest:
“Generally, any interest (including original issue discount) accrued on a reverse mortgage is considered interest on home equity debt and isn’t deductible.”
What nonsense!! Here is how acquisition indebtedness is defined in the Internal Revenue Code 163(h)(3)(B):
“(B)Acquisition indebtedness
(i)In general
The term “acquisition indebtedness” means any indebtedness which—
(I)is incurred in acquiring, constructing, or substantially improving any qualified residence of the taxpayer, and
(II)is secured by such residence.”
We all know that the principal residence secures a reverse mortgage (meaning serves as the so the last part is not at issue (or at least I hope not).
We also know that certain reverse mortgages (such as the HECM for Purchase) are designed to allow borrowers to use their proceeds to purchase the collateral as a principal residence. Seniors also use proceeds to substantially improve the home to accommodate senior living and other reasons.
Further under the definition of acquisition indebtedness, 26 USC 163(h)(3)(B), the following is stated: “Such term also includes any indebtedness secured by such residence resulting from the refinancing of indebtedness meeting the requirements of the preceding sentence…”
Most of the time, mortgages with acquisition indebtedness are paid off through the reverse mortgage. That is exactly what the quotation in the prior paragraph is referring to.
For a couple of years I have known about the misstatement. Yesterday, I took action to get the IRS to change it. About a decade ago, the IRS stated in the same publication that not only must reverse mortgage acquisition indebtedness be paid to obtain a deduction but the reverse mortgage had to be terminated. That goes against what the only IRS Revenue Ruling (80-248) says about such deductions. After 36 months of going back and forth, the IRS conceded and removed the requirement that the reverse had to be terminated before paid acquisition indebtedness interest could be deducted.
As a early Baby Boomer, I do not look forward to another potential 36 month battle with the IRS but when you cannot endure seeing something this bad being promoted, you have to act. The worse thing about this misstatement is that it is coming from the same federal government who insures HECMs and HMBSs.