The Costs of Retiring with a Mortgage

Ilyce Glink

A mortgage is a mortgage, even if you're only paying 4 percent on a 30-year fixed-rate mortgage.

The trouble with mortgages is that they tend to last up to 30 years, unless you move, get a 15-year mortgage or figure out a way to pay down your debt on a monthly or yearly basis. If you don't pay down your debt or sell your home, you'll be paying your lender a monthly payment for the next 360 months in a row.

That's not such a big deal if you're 30. If you get a 30-year mortgage you'll pay it off by age 60, well before you hit full retirement age.

Except that most people don't live in the same place for 30 years. And if they do, odds are they don't have the original mortgage they used to buy their property.

Let me explain: While baby boomers and their parents tend to live in the same place for decades, they've refinanced their mortgage over and over again.

As you may have heard, while property values were seemingly skyrocketing over the past decade, millions of Americans tapped into those paper values, doing cash-out refinancing in order to pay for everything from new cars to fancy vacations to high-end kitchen renovations and additions to college tuition bills.

But when the housing boom turned into a bust, and property values began to collapse, it became clear that millions of Americans had over-extended themselves and are now trapped in homes that were less than the amount owed on the property.

But even though those homeowners still have equity in their properties, they're saddled with 15- and 30-year mortgages that are set to run for at least another decade or two.

Many baby boomers, the first wave of whom were born in 1946 and will start turning 65 next year, are having trouble making monthly mortgage payments that seemed easy when priced on interest-only loans featuring below-market teaser rates. The Pew Research Center recently found that 55 percent of all Americans are earning reduced income, thanks to layoffs, forced furloughs and limited bonuses. A lot of baby boomers who ought to be in their prime earning years fall into this category.

And it doesn't help that real estate property taxes are rising even as housing prices are falling. Higher property taxes, insurance premiums and maintenance costs are squeezing homeowners who can hardly make their payments as it is.

In fact, baby boomers are having trouble paying many of their living expenses, including their mortgage.

According to a new survey by Generation Mortgage and Zogby International, 64 percent of baby boomers who are supporting parents and children (often known as the "Sandwich Generation") describe their financial situation as negative. Twenty-three percent of those polled have lost a job recently and 24 percent have taken a cut in pay of benefits.

Most notably, 78 percent of those polled are worried about having enough money to retire comfortably.

"The Sandwich Generation is probably the most financially vulnerable demographic to result from the recession," said Jeff Lewis, Chairman, Generation Mortgage Co., a large reverse mortgage lender. "They are unemployed or underemployed, financially supporting two generations in their family and are saddled with debt from bills and a mortgage. As this group looks to retire, their financial situation, coupled with the state of the economy, is not leaving them with many options."

The costs of retiring with a mortgage are steep: Making that monthly mortgage payment, even if your interest rate is priced at 4 percent, can take a huge bite out of your retirement income.

If you're refinancing your mortgage now to take advantage of new lower interest rates, you may want to try to cut the term of your loan. Every year you shave off the term will save you thousands of dollars over the life of that mortgage.

For some in the Sandwich Generation, taking out a 15-year mortgage and being done with the mortgage before retirement may make the most financial sense -- as long as they can afford the higher monthly mortgage payments.

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