Keeping a mortgage after 65: ‘No brainer’ or running big risk?

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

That’s not how Brian Lindmeier sees it. “It just doesn’t make any sense at all to pay off 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, at the end of 2020. They rolled over their balance into a new 30-year loan and slashed their interest rate in half to a rate below 3%. Lindmeier called the move a “no-brainer.”

“The money I’d have to take out of my savings or out of my investments is yielding higher interest than the interest I’m paying on the loan,” he said.

For a growing number of older Americans, signing up for a mortgage that is likely to outlive them makes good economic sense. A significant percentage of homeowners have fixed-rate mortgages with historically low rates. Roughly 6 of 10 mortgage borrowers in the third quarter of last year held loans with interest rates of less than 4%, according to the online real estate brokerage Redfin. Nearly one-quarter had rates of less than 3%.

A campaign of rate increases by the Federal Reserve, which is intended to tamp down inflation, has driven yields that investors can get on ultrasafe instruments like certificates of deposit to 5% or higher.

Even those who have spent years saving with the intention of paying off their mortgages with a lump sum at retirement are now finding themselves recalculating. Some are determining that those funds would be better deployed by 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 a number of his members, including Lindmeier, were keeping their mortgages — and their cash.

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

A number of financial advisers and retirement planners argue that the imperative to pay off a mortgage before retirement is an outdated axiom in the current economic climate.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 a debt feels like a very conservative, secure move, trading your liquidity for a paid-off mortgage is quite risky,” said Evan Beach, president of Exit 59 Advisory, a wealth management firm focusing on retirement-income planning in Alexandria, Virginia. “You’re giving up money in your pocket that you may actually need for something else.”

Gary Jacobs, a client of Beach’s and a retired federal employee, and his wife, Donna, a retired nurse, refinanced the mortgage on their home in Chevy Chase, Maryland, at the end of 2021 when mortgage rates were at a historic trough.

“Timing is everything, and we timed it just right this time,” Gary Jacobs, 79, said. Refinancing into a new 30-year mortgage at a rate roughly half of their previous interest rate lowered the couple’s monthly payment by around $300.

“Although we could have, we didn’t feel like drawing down on our cash reserves in order to pay the mortgage off,” Gary Jacobs said, adding that paying off the mortgage would have taken about half of their savings. “We’re conservative in the sense of wanting to be prepared for eventualities where we might need the cash.”

This dynamic is one factor driving historically large percentages of older Americans to carry mortgage debt into their senior years, according to a new report from the Joint Center for Housing Studies of Harvard University. In 2022, researchers found that just over 40% of homeowners older than 64 had a mortgage, a jump from roughly 25% a generation ago.

Ultralow mortgage rates were a big driver of the increase, said Jennifer Molinsky, project director of the center’s housing and aging society program. “We do think that, for some people, there is a calculated financial decision that they’d 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 came in tandem with an overall rising debt load among seniors. “There’s a trend among all older adults that there’s a higher level of debt across the board,” she said.

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

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

Older homeowners might also have mobility limitations or other physical challenges that make maintenance and upkeep of a property more challenging.

“People need to maintain the value of that asset if they want to use that equity later in life,” but, Trawinski added, maintenance can entail significant costs.