Ask Liz Weston

Get smart with your money

Mortgages

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

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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: Looking to Medicaid to pay for assisted living

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Dear Liz: I am going to sell my house, pay back my reverse mortgage, spend down and go on Medicaid in order to pay for assisted living that I need. What are some good resources I can contact to help me navigate all this? I have done a lot but am still needing more help.

Answer: Medicaid, the government health insurance program for the poor, typically doesn’t cover the room and board costs of assisted living, but many states offer Medicaid waivers that pay some assisted living expenses. Even if you qualify, though, there are typically a limited number of waivers available and you may be put on a wait list.

You definitely shouldn’t sell your home or spend down your resources before consulting with an expert. You can contact the National Academy of Elder Law Attorneys (NAELA) for a referral to a lawyer who specializes in this complex area or use the American Council on Aging’s free locator tool to find a Medicaid planner.

Q&A: Managing mortgage debt in retirement

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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?

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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.

Q&A: Home sales and taxes

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Dear Liz: My in-laws passed away earlier this year within months of each other. Their primary asset, part of their living trust, is their home, worth close to $1 million. There is a reverse mortgage of about $332,000 that will be paid off once the house sells. Will capital gains tax apply to the four beneficiaries? Or do we get to take advantage of the step up in cost basis? The house is in escrow right now. I don’t think the house has gone up in value since the last death.

Answer: The home will get the favorable step up in tax basis. That means the beneficiaries won’t have to pay capital gains tax on all the appreciation that happened during the parents’ lifetime.

Q&A: When a HELOC rate is too good to be true

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Dear Liz: My current home mortgage rate is 5%. I owe about $340,000 on the house and have about $300,000 in equity. My credit union is offering a home equity line of credit with a rate of 3%. Would it be a good idea to take out a HELOC at that rate and use those funds to pay down or pay off my mortgage?

Answer: Prevailing HELOC rates are closer to 9%, so what you saw is likely a teaser rate that would eventually expire. After that, you’d pay the regular variable rate, which would rise and fall with prevailing interest rates up to a predetermined cap, which is usually 18%.

So no, it’s not a good idea to give up your current relatively low rate. HELOCs and other variable-rate loans are a better fit for short-term borrowing that you can pay off relatively quickly.