Conventional wisdom has long held that it’s better to pay off your mortgage before you stop working and go into retirement. But advisors are seriously rethinking that strategy.
For clients who have a mortgage from prior years, when interest rates were at historic lows, hanging onto the loans may be a better option for retirees in an environment where interest rates are rising, some advisors say.
“Paying off one’s mortgage can be desirable, but it’s not a slam dunk,” said Russ Story, a financial consultant at Story Wealth Management Group in Douglas, Ga.
Advisors say that the current economic environment, with the Fed pursuing a hawkish strategy on interest rates to combat inflation, what advice to give retirees on their mortgages has suddenly become tricky.
For t he most part, some say, the traditional thinking still holds true.
“For most retirees, most of the time, it's best to enter retirement with no mortgage,” acknowledged Charles Lewis Sizemore, chief investment officer at Sizemore Capital Management in Dallas. “Do you really want the stress of a mortgage hanging over your head in your golden years?”
Rocco Carriero, CEO and founder of Rocco A. Carriero Wealth Partners in Southampton, N.Y., concurred. “Because of the importance of maintaining positive cash flow during retirement, I generally advise clients to pay off their mortgage if reasonably possible,” he said. “Eliminating fixed expenses can reduce financial stress, helping one to achieve the ultimate goal—a worry-free retirement.”
Yet that logic may be changing. What’s different today is that mortgage rates have been on a seesaw ride.
Last year, the average rate for a 30-year mortgage was just 2.96%. This year, as the Fed raised interest rates, 30-year-fixed mortgages soared from a low of 3.45% in January to 6.11% in September, a level not seen since the middle of 2008.
“If you have secured a low-rate mortgage, you can theoretically use your liquidity to invest in the market with the goal of achieving a higher rate of return than the cost of your mortgage,” said Amy Sabin, managing director and partner at Steward Partners in Dallas.
Sizemore put it this way: “Mortgage rates, particularly if you bought or refinanced prior to this year, were low enough to be almost free money.”
But of course, you also have to consider how much you can expect in returns from investing those funds instead of using them to pay off your mortgage. “You have to determine if your equity is better in the home or in other investments that may produce income and/or growth,” said Brett Bernstein, CEO and co-founder of XML Financial Group in Rockville, Md.
Holding onto a mortgage in later years seems to be a trend. According to the Federal Reserve, nearly 38% of people between 65 and 74 had mortgages or home-equity lines of credit on a primary residence in 2019, when mortgage rates averaged 3.94%. Back in 1989, when the average mortgage rate was a whopping 10.32%, just 22% of people in that age bracket owed money on their primary residence.
That doesn’t surprise Chris Briscoe, vice president and wealth advisor at Girard, a Univest Wealth Division, in King of Prussia, Pa. “With interest rates so low [in 2019] and markets performing the way they have been for the past five or 10 years, people may have felt more comfortable taking out a mortgage or refinancing in order to lower their existing payments,” he said.