Mortgages

Q&A: Reverse mortgages can be a boon, but come with potential risks

March 3, 2025 By Liz Weston

Dear Liz: Please write about the issues people can face when they have a reverse mortgage and need to move out to get long-term care. My mother, who is now 94 and lives on a small teacher’s pension, got a reverse mortgage in her late 60s to donate to charity because she was sure she would not live past her 80s. Now she needs long-term care and does not have the funds for it. If she moves out, she is required to sell the home. The capital gains taxes will eat up any remaining equity after that reverse loan is paid.

Answer: A reverse mortgage can be a helpful tool for people 62 or older who are house rich and cash poor. These mortgages allow people to tap some of their equity without requiring that the balances be paid back until the borrower dies, sells the home or permanently moves out.

The problem is that the debt can grow over time and leave too little equity for late-in-life expenses, such as long-term care.

Of course, many people make the mistake your mother made by underestimating their longevity risk — the chance they’ll live longer than expected and run short of money. They focus on maximizing current income by saving too little, taking out reverse mortgages too soon or applying early for Social Security without fully considering what these decisions could mean for their future selves.

Please get your mother in touch with an elder law attorney who can assess her situation and suggest alternatives. He can advise her about qualifying for Medicaid, the government health program for the poor. Medicaid will pay for long-term care expenses but rules vary by state, and a mistake could delay her eligibility.

Q&A: The new roof is done. Now, what’s the smart way to pay for it?

December 10, 2024 By Liz Weston

Dear Liz: I borrowed $35,000 from my home equity account a couple of years ago to pay for a new roof. The house is paid for; there is no mortgage. My wife thinks I should pay off the balance, which is $29,000. This would create a significant gap in our liquid assets. The current payment is affordable and convenient, so I’m content to leave things the way they are. Am I missing something?

Answer: That depends on what you mean by “home equity account.”

When you borrow against your home’s equity, you typically use either a home equity line of credit or a home equity loan. Home equity loans usually have fixed interest rates, fixed payments and a defined payback period, such as 10 or 20 years. Home equity lines of credit are more like credit cards: They have variable interest rates, and you can draw down and pay back what you owe more flexibly.

However, HELOCs have a bit of a built-in trap. In the initial draw period, usually the first 10 years, you often don’t have to pay down what you owe. You’re typically required to pay only interest. When this draw period ends, you must begin making principal payments on any outstanding balance, so what you owe each month can shoot up dramatically.

That’s why HELOCs are often best used for expenses that can be paid off relatively quickly. If you need a decade or more to pay back what you owe, a fixed-rate home equity loan may be a better option. Some lenders offer a fixed-rate option as part of their HELOCs, which could allow you to lock in a steady rate on some or all of your balance and pay it off with fixed payments over time.

Regardless of what type of loan you have, the interest you’re paying probably exceeds what you’re earning, after tax, on your savings. Paying off a HELOC balance would allow you to tap that credit again in an emergency, if necessary. Paying off a fixed-rate loan wouldn’t free up credit immediately, but you could redirect the monthly payments into your savings to rebuild your cushion. If that makes you nervous, you could consider making larger monthly payments to pay back the loan sooner while keeping the bulk of your savings intact.

Q&A: Rob Peter to pay … off the mortgage?

November 4, 2024 By Liz Weston

Dear Liz: Would it make sense to pay off a low-balance, refinanced mortgage at 3% using a portion of my wife’s 401(k)? Would that not be better than paying the mortgage off from my IRA? I am 70 and on Social Security. My wife still works, at least till her birthday in December. She will then be 70 as well and should qualify to maximize her Social Security payout.

Answer: It’s not clear how a withdrawal from one account would be “better” than the other, given your similar ages and the fact that either withdrawal would be taxable as income. The more appropriate question might be why you’re in such a rush to pay off this mortgage.

At this point, you’ve paid most of the interest on this loan and your payments are largely principal, so you won’t save much by paying the loan off early. If there’s a compelling reason to do so, then you may want to postpone the withdrawal until your wife retires and you’ll presumably be in a lower tax bracket. A tax pro can help with that projection.

You should be consulting a tax pro in any case, since required minimum withdrawals from most retirement accounts have to start at age 73 and you may need help managing that tax bill.

Q&A: Managing mortgage debt in retirement

April 29, 2024 By Liz Weston

Dear Liz: My husband and I are Gen Xers who are renting. We have enough cash from the sale of our last home to make a small down payment on another. If we moved to a more affordable community, we could manage the payments, but it would still be a stretch. That scenario would not have bothered me 10 years ago, but now I’m close to 50. Is it a good idea to take on a mortgage at this point? What is the best way to ensure I can afford to keep the roof over my head when I can no longer work full time?

Answer: Having a mortgage in retirement used to be uncommon, but that’s no longer the case. The Joint Center for Housing Studies of Harvard University found 41% of homeowners 65 and older had a mortgage in 2022, compared with 24% in 1989. Among homeowners 80 and over, the percentage with mortgages rose from 3% to 31%.

The amounts owed have skyrocketed as well. Median mortgage debt for those 65 and older rose more than 400%, from $21,000 to $110,000 (both figures are in 2022 dollars). Median mortgage debt for those 80 and over increased more than 750%, from $9,000 to $79,000.

Mortgage debt doesn’t have to be a crisis if you can afford the home and the payments don’t cause you to run through your retirement savings too quickly. In fact, some retirees are better off hanging on to their loans. It may not make sense to prepay a 3% mortgage when you can earn 5% on a certificate of deposit, for example. Paying off a mortgage early also could leave you “house rich and cash poor,” with not enough savings to deal with emergencies and later-life expenses.

But the key is affordability. A mortgage that’s a stretch now might become easier to afford if your income rises, which was almost a given when you were younger. Now, however, you’re approaching the “dangerous decade” of your 50s, when many people wind up losing their jobs and failing to ever regain their former pay, according to a study by ProPublica and the Urban Institute.

Renting has its risks as well, of course. You aren’t building equity and you typically have little control over rent increases, other than to move.

For help in sorting through your options, consider talking to a fee-only, fiduciary advisor. Among the most affordable options are accredited financial counselors and accredited financial coaches, who typically are well-versed in the money issues facing middle-class Americans. You can get referrals from the Assn. for Financial Counseling & Planning Education at www.afcpe.org.

Q&A: Their variable-rate loan is out of control. What should they do now?

November 20, 2023 By Liz Weston

Dear Liz: We paid a lot for our house, and a lot to renovate it seven years ago. My banker recommended taking a low-interest loan against our assets at the bank instead of selling investments to pay for the renovations, which cost $900,000. The bank offered a rate of prime plus half a point. Up until a year ago, this loan cost me about $1,200 to $1,600 per month. However, those payments have now jumped to about $5,000 per month. I’m selling stocks and bonds, on which I will have to pay taxes, to cover this amount. We have enough to pay off the loan, which is what my banker has suggested doing since interest rates have gone up so much. However, my wife and I are reluctant to liquidate so much in stocks and bonds. We would incur the tax consequences and it would not leave us as liquid as we would like to be. We love our house and neighborhood, and we are locked in a mortgage rate of 2.65% for another six years, so we are reluctant to sell. Any advice?

Answer: Your options aren’t great, but you already knew that.

As you’ve learned, variable-rate loans are inherently risky and better for short-term borrowing than for financing long-term debt. Interest rates stayed so low for so long that many people lost sight of the risk that affordable payments might not stay that way.

Interest rates are unlikely to plunge any time soon, but paying off the loan by selling investments could leave you house rich and cash poor. If interest rates do ease, you could regret having incurred unnecessary taxes — plus the investments you sell can’t earn you future returns.

Trying for a cash-out mortgage is another potential solution with significant disadvantages, given current high mortgage rates. Selling your home could be the best option if you can’t afford the property but may be an overreaction if you can.

The right solution will depend on the details of your financial situation. A fiduciary financial advisor — someone dedicated to putting your best interests first — could help you make a more informed decision about what to do next.