Nearly Retired, Lugging a Mortgage

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Traditionally, the picture-perfect retirement included a paid-off house.  But the Me Generation isn’t sticking to the script.

Snapshots of three generations of U.S. households on the cusp of retirement – people born in the Depression, at the beginning of World War II, and after the war – show that more of the most recent generation, the baby boomers,  are still carrying mortgages as they head into their retirement years.

About 40 percent of households who were between the ages of 56 and 61 in 1992 – the Depression-era parents of baby boomers – held mortgages at that age.  This share had increased to 48 percent by 2008, as the front wave of baby boomers were reaching their late 50s and early 60s

“The current generation has bought larger, more expensive homes, and they arrive at retirement with more mortgage debt,” concluded George Washington University business professor Annamaria Lusardi, who presented the findings of her study with Olivia Mitchell of the Wharton School during an August meeting of the Retirement Research Consortium.

This doesn’t necessarily create financial problems if the borrower plans to work longer or has sufficient assets to offset his mortgage debt.  But the researchers’ analysis also indicates some financial distress in this age group: 24 percent of households had less than $25,000 in savings in 2008, compared with 18 percent in 1992.

A different survey that Lusardi and Mitchell analyzed showed that nearly 40 percent of individuals between ages 56 and 61 admitted to having “too much debt right now.”

Many also purchased properties during the housing market boom, paying smaller down payments than they had in the past.  After the market collapsed, 17 percent of older households were left with houses worth less than what they owed on their home loans.

With retirement looming, people approaching retirement age “should be at the peak of their wealth accumulation” Lusardi said.  Instead, she said, “they will have to deal with debt and debt management way into their retirement.”

Full disclosure: The research cited in this post was funded by a grant from the U.S. Social Security Administration (SSA) through the Retirement Research Consortium, which also funds this blog. The opinions and conclusions expressed do not represent the opinions or policy of SSA or any agency of the federal government.

Joan Hillman

You are so right. In many cases, the baby boomers have been the victim of the financial downturn, events in their lives, and poor planning.

Someone who is still working can actually pay down their mortgage with a reverse mortgage.

For someone who is retired and not working, paying off a mortgage increases cash flow that can help them make ends meet and reduces risk. Finally, for the baby boomer who have paid off their home, there is the standby reverse mortgage that gives them access to equity to use in the future.

There are options for someone who is upside down on their mortgage. They can apply for a HARP loan through their lender. This option will reduce the interest rate and lower monthly payments.

Baby boomers have some real challenges ahead if they do nothing, so it is important that they educate themselves.

David Bellows

In addition, what kind of seller’s market will baby boomers encounter once they decide to get out from under these outstanding mortgages? While many boomers are financially stretched for their current house, they may have trouble finding younger buyers that are willing to take on a similar level of debt.

Larry Littlefield

Those in the first half of the baby boom were richer than those in the second half, who were richer than Gen X, etc. Those who would be buying now are the worst of all.

They can’t afford to pay as much for housing, although the government is doing all it can to push them to do so.

Wendy Weiss

Most Boomers’ started working in an economy that was very different from that of their parents. Mortgage rates moved higher in the 1970s, reaching around 18% at the end of that decade. (It was considered a “steal” to have a mortgage rate of 13% in 1983.)

Boomers did have children, so they bought houses in areas with good schools. Yes they may have paid too much for their houses, and may have put more money in for construction, and interior design.

But Boomers seemed to get a reprieve. Interest rates started dropping after 2001 and were held artificially low. So Boomers refinanced. (It felt a bit like a hobby, finding a new, lower rate mortgage every few years.)

While refinancing at a lower mortgage is generally considered a prudent financial move, stretching mortgage payments out another 30 years can be considered dicey. Those Boomers who lost their jobs in the Great Recession felt the impact most directly.

Boomers who are still employed, and still have mortgages, need to develop careful financial plans for their retirement. Housing costs, not health, are the biggest post-retirement costs. So Boomers, like me, need to develop strategies to reduce their housing costs after they retire. Downsizing and gaining access to the equity in their homes are part of a good strategy. Especially now that housing prices are rebounding.

David Bellows is correct, that younger buyers may not be able to afford the high prices that Boomers want for their houses when they sell them.

My advice, sell now, while interest rates are still abnormally low, so you can get a higher price for you home.

Or, develop a careful strategy for paying off your housing costs, as your property taxes (are likely to) rise in the coming years, just when your paychecks stop.

Home Loan

As a mortgage loan officer for the last 14 years Im not to fond of reverse mortgages. We have had numerous borrowers come to us wanting to be refinanced off the reverse mortgage. But for some borrowers they can be very beneficial.

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