Retirement Debt: Does a 30-year Mortgage Make Sense? Monroe NC

Retirement beckons, and you have many real estate choices to make. Do you downsize or relocate, or do you stay in a home in which you have a large amount of equity – or even own outright? If you sell, how much of the proceeds should you put into the new home versus savings or investments?

First off, know that if you want to finance the purchase, federal law prohibits lenders from denying you a mortgage loan based on your age. But most people’s income drops during retirement, so they might not qualify for as large a loan as in the past, says Pamela Hamrick, LendingTree Loans’ vice president of operations.

If you do take out a mortgage in retirement, it’s important to plan ahead for higher monthly expenses, such as property tax increases, or ballooning homeowners’ insurance premiums like those seen in Florida after the 2005 hurricane season, she says. “It all goes back to making sure you’ve got enough money somewhere for those potential changes, especially when you get on in years.”

Eve Kaplan of Kaplan Financial Advisors in Berkeley Heights, NJ, sometimes suggests 15-year mortgages for people who are still working, because their payments end sooner. People planning to live in a new home for only 10 or 15 years before moving into a retirement community should consider taking on a bigger mortgage rather than sinking most of their cash from the sale of a previous home into the property, she says. But interest-only or adjustable-rate mortgages can be a disaster for people heading into retirement, she cautions.

Financial planner Kenneth Robinson of Cleveland suggests asking yourself the following questions:

1. Does just the idea of having a mortgage make you nervous?

2. How reliable is the income you would have to draw upon to make the payment?

3. Are you used to paying a mortgage every month, or has the prior home been paid off for some time? The more a mortgage payment is a regular part of their lives, the more comfortable they are likely to be to keep it.

4. How aggressively or cautiously do you expect to invest in retirement? If the after-tax cost of the mortgage is less than the after-tax benefit of investing the money, having more money to invest starts to look good.

But Jim Ludwick of MainStreet Financial Planning in Odenton, MD, recommends putting from 75 percent to 100 percent of the net proceeds from the home sale into the new property. “Most middle-class clients that I deal with prefer not to have a mortgage in retirement and like to think about using a reverse mortgage in an emergency,” he says.

And Andrew Tignanelli, president of The Financial Consulate in Lutherville, MD, adds this thought:

“I have a saying for this exact situation. ‘If you are looking to make money in retirement, then consider a small, moderate mortgage. If you are looking for peace and contentment, then stay debt-free.’ ”

It’s a complicated question, so sort through your options carefully to decide how to balance your debt, investments and savings.