Retiring Without a Home Loan

It has long been part of the American dream for the homeowner to burn the mortgage note and welcome, as soon as he or she is able to pay it off. Conventional wisdom held that this would help pave the way for debt-free retirement.

But the earthquake today, many financial advisers suggest that homeowners wait.

"I think paying off the mortgage would probably be a poor decision financially right now," said Gibran Nicholas, chairman and CEO of Certified Mortgage Planning Specialist Institute, which trains and certifies financial planners who provide mortgage and real estate equity advice.

The decision, he says, depends on cash flow and profitability.

Debra Shultz, CEO of Manhattan Mortgage Company, said that homeowners approaching retirement will have to make sure they have enough cash to cover daily expenses. When the mortgage is paid off, she noted, "you can not take it back unless you refinance and cash out."

And funding of retiree might be difficult. "Increasingly their earnings could fall, which could prevent them from refinancing and timing," she said.

In some cases, homeowners would get better returns by investing the money they had used to pay the mortgage. "Why pay a mortgage and save maybe 3 percent after taxes when you could be putting the money in Muni bonds earning 4.5 percent after taxes right now?" Mr. Nicholas said.

Provides could potentially be even greater if the retiree bought vacation or retirement home on the cheap. "I think it's going to be a fire sale and they have a chance to grab assets at fire-sale value," said DaRayl Davis, a money manager and author of "Secrets of the New Economic Environment Retirement" (Xlibris, 2009).

Financial advisers also contend that it makes little sense to pay a mortgage on a property whose value is still lower. In fact, home prices in the top 20 markets have fallen more than 30 percent on average, from their peak in June 2006, with those in Las Vegas, for example, tumbling 60 percent, according to Alex Barron, founder and president of Housing Research Center.

Prices in New York City at 22 percent from their peak levels, he said, adding that he expected home prices decline another 5 percent before bottoming in the next 1-2 years.

Mr. Davis is even more bearish, predicting that prices could slide another 30 percent. "The bubble has burst," he said, "and it's not done yet depressing."

Mr Nicholas recommends that all homeowners with a mortgage rate of 7 percent try to refinance to a lower rate if refinancing costs are not too high.

Then there are the tax consequences of losing the mortgage deduction. This is only relevant, Ms. Shultz noted that the owners of capital is less than two-thirds of pay. When two-thirds threshold has been reached, the interest deduction, if any, is small and does not justify keeping the mortgage.

Of course, should the good sense to live debt-free is not possible. "Trading by well-known 4 percent growth for unknown market return may leave some retirees nervous tension," said Drew Denning, vice president for service retiree major Financial Group.

For those who stop paying the mortgage early - maybe they want to eliminate debt to pay for school children - experts suggest that they have at least 12 months' living expenses in cash available outside of billing their retirement after the home is paid off . It is twice the amount usually recommended in good times.

Mr. Denning speaks with as much as two years worth of living expenses. "The ability to find another job that pays a similar amount is very challenging in today's environment," he said. "And going to the bank to borrow when you are unemployed would not be one of the more friendly visits you need."

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article source :- http://www.nytimes.com/2011/11/13/realestate/mortgages-retiring-without-a-home-loan.html