Managing Your Mortgage Debt

OCEAN CITY – Historically, most Americans have paid for their homes by the time they reach retirement age and leave the full-time workforce. But many of today’s baby boomers have a strikingly different attitude when it comes to a mortgage loan.

"Homeowners are carrying more housing debt than ever, and are preparing to take much of that debt with them into their retirement," says Rob Mickler, a Vice President and Consumer Finance Specialist with Merrill Lynch.

In fact, the Federal Reserve’s most recent Survey of Consumer Finances reports that roughly one-third of households headed by a person age 65 to 74 carry home mortgage debt, up from 26 percent in 1998.

That willingness to take on debt could spell trouble for many investors’ retirement security, however. If the real estate market cools or if interest rates rise significantly for an extended period, retirees could find themselves with less equity in their homes to tap and higher monthly mortgage payments than they anticipated — resulting in a cash crunch that forces them to rethink their retirement lifestyle.

The good news is that there are plenty of ways to keep your mortgage obligations under control while keeping you on track for your ideal retirement.

For many homeowners, paying off a mortgage before retiring is the smartest move — after all, doing so removes a large fixed monthly expense and frees up more cash.

"You must review your mortgage debt in relation to the rest of your finances to see if your plan for retirement income will satisfy that debt," says Mickler. "If not, you should be thinking about eliminating the debt or reducing it, perhaps by downsizing to a smaller home."

That said, there are sound reasons to consider carrying at least some mortgage debt into your golden years — for example, if paying off your mortgage all at once would deplete too much of your cash reserves, force you to sell existing investments and generate big capital gains taxes or otherwise alter your retirement plan. Also, if you carry a mortgage with a low long-term fixed rate, you might prefer to grow your nest egg by investing the additional cash the low rate affords you in a retirement account.

It also makes sense to consider your mortgage in relation to your overall portfolio, notes Mickler. If your investments’ expected overall rate of return over time exceeds the cost of your mortgage, you may come out ahead and it may be worthwhile to reconsider paying off your debt too quickly without reviewing the effect on your long-term goals.

A number of options are available to help you manage your monthly mortgage obligations and other finances. For example, you might set up an automatic investment and payment program that directs the appropriate amount of incoming cash to your mortgage and investments.

Another useful option is a home equity line of credit (HELOC). By allowing you to borrow against the equity in your home, a HELOC can help you fund retirement expenses — such as the purchase of a second home or retirement property, education costs or home improvements — without having to sell your existing investments and potentially disrupt your portfolio.

Finally, some boomers approaching retirement might benefit by refinancing their current mortgage.

Take the time now to review your mortgage in relation to your retirement goals, and make any adjustments if necessary to help ensure that your financial strategy is set to deliver a comfortable retirement down the road.

(A Merrill Lynch Senior Financial Advisor. She can be reached at 410-213-8520.)