Vol 7 No. 48 - August 22, 2007

Boomers ask: ‘To mortgage or not to mortgage?’

By Louise Bolger
sun staff writer

Hardly a day goes by that you don’t read something about the baby boomers and how much influence their generation is having on the new millennium. Even though people like my husband are sick to death of hearing about baby booms this and baby booms that, the truth is this gigantic generation is going to have the biggest affect on lifestyle than any previous one. And when it comes to home financing, don’t look for too many mortgage burning parties. The baby boomers are throwing that ritual right out the window along with the rocking chairs.

It used to be if you were lucky enough to get to retirement and have your house paid for you, were sitting pretty. But times they are a changing, and as people start heading down the road toward retirement, they are starting to question the advantage of living in a paid up house.

If you decide to keep a mortgage on your primary property even after retirement, you won’t be alone. At least 32 percent of households headed by someone age 65 to 74 were carrying home mortgage debt, and nearly 20 percent of households headed by those 75 and older had a mortgage, according to the triennial Federal Reserve Survey of Consumer Finances conducted in 2004. I think the results of the next triennial survey will see an increase these percentages.

Every family’s financial position is of course different, but more and more people entering retirement are making the decision that it makes financial sense to carry a mortgage. This is especially true if mortgage rates are low and it’s possible to earn a large enough return on money invested to pay the mortgage and still have a significant gain. In addition, there are a couple of other significant reasons to support keeping a mortgage.

Mortgage interest is still one of the best write offs the average person has. The larger the mortgage and the higher tax bracket you’re in, the most financial benefit you will gain from maintaining a mortgage on your home. This is especially true if you’re single and don’t have the tax advantage of married couples. In addition, withdrawing money from a retirement plan to pay down a mortgage, when the retirement plan is 100 percent taxable upon distribution, may not be the best choice.

For example, a couple with a $50,000 taxable retirement income who pulls $100,000 out of their 401 (k) plans to pay off the mortgage, plus enough to pay off the additional taxes, will reduce their savings by at least $135,000, assuming there are no other penalties. That’s a big price to pay not to have a mortgage, and an even bigger price to pay if the stock market goes up and the housing market goes flat.

However, if you feel you want to leave your home to your heirs, it’s not a bad idea to pay off your mortgage gradually by making extra payments every month or every few months toward the principal. This could substantially cut into the outstanding principal without sacrificing the tax benefits of holding a mortgage or the tax obligation of withdrawing invested funds in a lump sum.

I guess if the only thing us baby boomers have to worry about is avoiding taxes, then life after retirement can’t be all bad. These are major financial decisions a lot more complicated than most of those facing our parents when they retired. Understand all the ramifications and seek professional advice, and if you decide to burn the mortgage, at least do it during the rainy season.

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