From the mailbag: Should I retire with a mortgage?
It's best to have your mortgage paid off when you enter retirement
A correspondent asks:
I’m 50 years old and buying a new home. Is a 30-year mortgage sensible for me?
Midlife in the Midwest
Hi Midlife-
In most circumstances, I would not opt for a 30-year mortgage at age 50.
When you retire, you won't have the same income to make monthly mortgage payments. Unless you have a pension that nearly matches your pre-retirement income, the only way to pay the mortgage will be to dip into your savings each month. If you have enough savings to do this, you could afford to pay off your mortgage and should probably do so; if you don't have enough savings to cover the monthly payments, you may become financially-stressed at some point in your retirement.
When evaluating a home purchase, buyers use the monthly mortgage payment as a measure of what is affordable in their financial circumstances. That’s a useful guide but you should ensure that the term of the mortgage aligns with your remaining working career.
For example, a 35-year old person can reasonably use a 30-year mortgage amortization as a proxy for what's affordable. Under normal circumstances, she will have paid off the mortgage by her retirement. However, a 50-year old taking out a new mortgage (or re-financing an existing one) has different timing. If you want to retire at age 65, use a 15-year mortgage term to determine what payment is affordable as you have fewer working years to pay off the mortgage. If the only way to afford the monthly payment is with a 30-year mortgage term, that’s a sign that the purchase price may be unaffordable in your financial circumstances.
Unless you have a significant income source in retirement or a future inheritance that would pay off the mortgage balance, opt for a mortgage term that does not extend beyond your expected retirement date.