More people retiring with mortgage payments

It’s an increasingly common dilemma: You want to retire — but you haven’t yet retired your mortgage.

Even before the debt-driven housing boom and bust, the numbers were getting ugly. Among households headed by someone age 65 to 74, more than 32 percent had a mortgage on their primary residence in 2004, up from less than 19 percent in 1992, according to the Federal Reserve.

Carrying a home loan into retirement? Here’s how to handle it.

- Living free. Start with this question: Should you strive to pay off your home loan so you can live mortgage-free in retirement — or should you aim instead to shrink monthly loan payments, thus freeing cash that can then be spent on other items?

If you have a heap of savings and a modest mortgage, go for the loan payoff. To that end, you might trade down to a smaller home or, alternatively, work part time until you’re rid of the mortgage.

If you have cash sitting in, say, a money-market fund held in a regular taxable account, also consider using these savings to reduce your loan balance. Sure, your mortgage may be costing you just 6 percent and the interest might be tax-deductible. But your money-market fund is likely yielding only 5 percent — and you have to pay tax on that income.

Things get trickier when dealing with individual retirement accounts and 401(k) plans. An AARP study found that many departing employees cash out their 401(k), often using the money to pay down debt.

This is foolish, because a big 401(k) withdrawal would likely trigger a huge income-tax bill. Instead, you’re better off slowly tapping your 401(k) or IRA to make your regularly monthly mortgage payments. That way, you would also continue to enjoy the mortgage-interest tax deduction.

If this strategy makes you nervous, consider using a chunk of your IRA or 401(k) to buy a “period certain” immediate-fixed annuity, says Rich Lindsay, a senior vice president with Symetra Financial in Bellevue, Wash. Let’s say you have 15 years left on your mortgage. To ensure you can make those payments, you could buy an annuity that will kick off 15 years of monthly income.

“If you’re risk-averse, this is a better strategy than taking a big withdrawal from your 401(k),” Lindsay argues. Avoiding the big 401(k) withdrawal makes particular sense if you are in a high tax bracket or if your mortgage has a low fixed rate, he adds.

One warning: If you buy the annuity, arrange to roll over the necessary retirement-account money directly to the annuity company. Don’t cash out the account first, or you could trigger the big tax bill.

- Shrinking payments. What if your mortgage is so large that paying it off will seriously crimp your retirement? “If you don’t think you’ll ever get to live mortgagefree, you might as well get the mortgage payment down as low as possible,” said Denver investment adviser Charles Farrell.

Imagine that, some years ago, you took out a $400,000, 30-year mortgage at 6.5 percent, giving you a $2,528 monthly payment. You’re now about to retire, the loan balance is $300,000 and your home is worth $600,000.

You could simply refinance that $300,000 back over 30 years. Even if you get the same 6.5 percent rate, that will trim your payment to $1,896.

Better still, trade down to, say, a $400,000 home. After forking over a 5 percent real estate commission and paying off your current mortgage, you could put down $270,000 on your new home, leaving you with a $130,000 mortgage. If you financed that over 30 years at 6.5 percent, your monthly payment would be $822.

You might even refinance later in retirement, further shrinking your monthly payment by again extending the loan over 30 years. Even in today’s tight credit environment, you shouldn’t have a problem qualifying for a new loan, as long as you have a reasonable amount of retirement income.

“My father bought a home two years ago and he got a 30-year mortgage,” said Keith Gumbinger, a vice president at mortgage-information provider HSH Associates. “He was 77 at the time and he didn’t have any trouble.”

SENIOR HOUSING

Mortgage borrowing has risen sharply among households headed by someone 75 or older.

- The good news: 85 percent of these families own their home.

- The bad news: Almost 19 percent had a mortgage on their home in 2004, versus less than 10 percent in 2001.

SOURCE: Federal Reserve