Issue 32.17
As a senior mortgage banker and also a registered investment advisor I work with many of the local and national investment groups with their mortgage clients. With home ownership and the use of a mortgage – everyone is different. Just like no one investment, security or annuity fits everyone’s needs, nor does one mortgage or one mortgage plan.
Ric Edelman has been named three times in the last five years as the top independent investment advisor in the country by the wall street journal – Barron’s Magazine. We have worked with hundreds of his client’s across the country. He has a great quote in the essence of; “The American dream is not to own a home outright, but to sustain a comfortable life for your entire life expectancy.”
Basically, the idea is simply that if you and your wife pass and the kids inherit a home is it vital that they own a home outright to sale and split up four ways? Meanwhile, you have made mortgage payments for one’s lifetime in order to simply have the goal of passing the home to heirs free of debt? So, we save money, and we put extra on the mortgage and we do what we have been taught all of our lives.
Nothing is wrong ever with saving money- don’t get anything wrong by that. But often, I see a couple that live late into their 80’s and still plugging away making a mortgage payment with a final goal of paying off the home at some point. They may or may not make it, but the kids will hopefully benefit from the equity in the home once they pass. Or my clients have paid the home off and the home is free and clear but their fixed income with social security and savings may not be enough to last through their lifetime.
Here is a couple of thoughts as you look at your own situation.
- Does it matter if there is a mortgage on the home when you and your spouse pass away? If there is 50,000 or 100,000 on the home when you pass and the kids split up the remaining equity will the kids be upset that you enjoyed your savings in your lifetime rather than worked away on that home to be free and clear for the kids?
- Ric believes we should have a long term mortgage for the rest of our lives. Depending on your financial situation, his teaching is simply that let’s keep our payment as low as we can in our retirement and make sure we have savings or investments as emergencies rather than burying any extra monies in a home.
So, clients will move into St. George and purchase a home and look at a 15 year fixed mortgage at the age of 70? Thus paying a higher payment until the age of 85 when the home will be paid off. They may make it or they might not. But, does it really matter? If a client takes a 30 year fixed mortgage with a lower payment, as seniors you can enjoy the additional 500.00 per month to use for discretionary income each month or “play” money. The down side of this is simply that when you both pass, the heirs or kids will have a mortgage on the home to pay off with the sale of the home. They will split up less equity in the home, but you have also enjoyed an extra 500.00 per month by not digging away at the mortgage.
- The final thought is simply if you are making a mortgage payment after the age of 62, do you have to? This is when we look at a reverse line of credit or mortgage to pay off the existing mortgage and have a home free of any mortgage payments for life without having to plug away at mortgage payments during your life time. For example if you have a home that is worth 250,000 and you still owe 165,000 and making mortgage payments, you can stop. Depending on your age and value of your home, simply take a reverse loan and use it only to pay off the existing mortgage. The kids will still get your home when you both pass, but they will have less equity in the home because the mortgage has accrued over your life time. You and your wife have not had to make any payments on the home, so you have saved and enjoyed the freedom of no mortgage payments, during your life and the down side is again above, there will be less equity in the home for the kids upon death.
It is amazing that when a retiree is pulling down an IRA or annuity each month to make a mortgage payment when they can eliminate the mortgage and draw less out of their retirement funds and extend their savings for a longer life span. That is simply the only philosophy.
But, at the end of the day, let us work with your financial advisor with our firm and strategize what your options are with your goals during retirement. The use of your home in different ways, could be the largest single retirement tool you can utilize.
Until next time. Brandon