QI am a 60-year-old professional who would like to take early retirement and move to my dream home on the East Coast. I would like advice about financing versus buying my new home without a mortgage. I anticipate that I will net $250,000 from my current home and the house I want to purchase is $350,000. Should I get a mortgage and keep my investments since interest rates are at historic lows?
AMany professional advisers aren't bothered by someone in your circumstances carrying a mortgage, especially with rates so low. A standard calculation is if the after-tax cost of mortgage debt is less than the potential after-tax return in a portfolio then you should take out the mortgage instead of locking more of your wealth in a home.
That said, even when the numbers suggest borrowing is a savvy move, many retirement-age people prefer the emotional security that comes from owning their home. I've also observed that many people find unexpected financial freedom in not having the monthly mortgage payment. Ownership strengthens a household's safety net. That's why I usually lean toward no debt in retirement, including a mortgage.
There is another factor to consider: Owning creates the realistic option of taking out a reverse mortgage. In essence, a reverse mortgage is an insurance-like option that allows a homeowner access to their home equity without moving. A reverse mortgage lets anyone 62 or older to borrow against their home's value. A homeowner makes no repayment until the house is sold (typically after death). Money can be taken as a lump sum, a line of credit or a regular payment schedule.
Understand that I'm not a fan of reverse mortgages. It's a complicated and expensive product. It should stay far down the list of income-generating choices for the elderly. Nevertheless, there are hopeful signs that this insurance-like product will improve with time. (For more details check out the Journal of Financial Planning article "Housing: A Potentially Active Player in Client Wealth Strategies," by Ed McCarthy, a certified financial planner.) Like annuities, it's a market worth watching and learning about.
So, what would I do your circumstances? I would initially plan on taking advantage of OPM -- Other People's Money -- to buy your dream home. You're putting down a hefty equity stake in the new home and your income will more than support the mortgage payments. You will buy yourself financial flexibility while you move and get comfortable in your new neighborhood, as well as take advantage of today's low rates.
However, once you've settled down and figured out what you're doing in your new community I would look at your assets and liabilities and decide when it makes sense to retire the mortgage. I still like the idea of you not having any debt as you age.
Chris Farrell is economics editor for "Marketplace Money." His e-mail is email@example.com.