Mortgages in Retirement: How to Buy, Borrow, and Pay Off Your Home

In today’s episode, you’ll learn more about:

• How retirees can purchase a new home before selling their current one.
• Why qualifying for a mortgage without a paycheck may be easier than you think.
• How home equity lines of credit and securities-backed loans can provide temporary financing.
• Why your retirement plan should determine how much mortgage debt you take on and how aggressively you pay it off.
• How to compare 15-year, 30-year, and adjustable-rate mortgages based on your expected payoff timeline.
• When mortgage recasting or paying points might make sense.
• How taxes and investment withdrawals can influence your mortgage payoff strategy.
• How to help adult children buy a home without jeopardizing your own retirement.

Listen Now:

The Smart Take:

Go Inside the Episode: 

0:00 – Intro

4:30 – What are you actually paying?

7:57 – What will still be covered?

9:20 – Can you reverse your decision?

13:00 – Does retirement income affect insurance costs?

16:23 – What to do before open enrollment

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The Hosts:

Kevin Kroskey, CFP®, MBA – About – Contact

Tyler Emrick, CFA®, CFP® – About – Contact

Episode Transcript:

Walter Storholt:

Well, Tyler, as someone who is currently selling a home, I am well aware that mortgage rates are above 7% at the time of this recording. And it’s leading to some interesting decisions for a lot of people, especially those getting ready to retire.

Tyler Emrick:

Oh, it really is. I mean, we see it all the time, these situations where maybe someone wants to downsize their current home or they want to buy a second home or maybe they just want to help their children purchase their first home. All sorts of situations on the gamut.

Walter Storholt:

Yeah. And now you think about, I don’t know, financing those purchases, the conversation’s changed a little bit over the last couple of months when especially you’re not going to be having that regular paycheck coming in anymore.

Tyler Emrick:

Yeah, no, I get the question all the time. “Hey, I’m retired. I don’t have a paycheck coming in. How am I going to qualify for a mortgage?” So that’s where the structure is very important.

Walter Storholt:

Now, you said structure. So you’re saying it’s more than just about looking for the lowest possible rate. That’s how I think about it.

Tyler Emrick:

Oh, yeah. Much more. We want to understand what the retirement plan could support, where’s the money coming from, what are the tax consequences, how quickly you might want to pay back the loan are all important. So that’s what we’re going to cover today in the form of three common mortgage situations we see with retirees, how to approach the financing, and why these decisions really need to be part of your overall financial plan.

Walter Storholt:

Welcome to another episode of Retire Smarter. I’m Walter Storholt alongside Tyler Emrick. He is a certified financial planner, a chartered financial analyst, and one of the wealth advisors at True Wealth Design, based in Northeast Ohio but serving clients all across the country. And it’s definitely a hot topic, I would say, today, Tyler, to talk mortgages. Maybe it’s because I’m selling a home and just recently bought a home that my algorithm is just feeding me nothing but doom and gloom-

Tyler Emrick:

Could be that.

Walter Storholt:

… about mortgages, and I’m having to definitely keep that in check a little bit here.

Tyler Emrick:

Sure.

Walter Storholt:

But this is top of my mind and I’m sure for other people too.

Tyler Emrick:

Hey, anytime you start seeing, I think we’re in the mid 7% range. Obviously, mortgage rates very dependent on credit score, all sorts of things. But I think the national average is around that mid 7% range. And we just look back a year ago, I think we were in the mid-sixes. So I mean, you see about a percent increase here this year. It’s not insignificant, that’s for sure. I mean, in the grand scheme of things, sure, you can go back to, if we have some listeners that maybe purchased their first home in the ’80s, you get those first mortgages in the 10%, 13% range, but it has been a number of years since we have seen mortgage rates this high.

Walter Storholt:

To be fair though, people are acting like it’s the end of the world. We were in the high sevens just, what, in 2023. So it wasn’t that long ago-

Tyler Emrick:

That long ago.

Walter Storholt:

… that we had a similar bump up.

Tyler Emrick:

Yeah, that’s true. That’s true. But it’s been volatile, and they were coming down in the right-

Walter Storholt:

It’s been volatile.

Tyler Emrick:

… direction, and now we’ve had that kick back up. And this is a question I get all the time, especially from retirees. So I figured we could take a look at, well, what are some of the three or a handful of very common situations and questions that I get all the time from retirees and talk about how we work through those challenges and think about it and provide advice on it. So if you’re thinking about downsizing, purchasing a second home, maybe helping out your kids with a home, you’re in the right spot. We’re going to cover those high-level topics today. And there should be some pretty good tidbits here, I think, for you to pull out.

So the first situation that pops in my mind, which comes up probably the most of all, is this whole concept of, “Hey, I’m retired. We’ve been retired and we want to downsize or we want to move closer to the kids,” or whatever the case is.

Walter Storholt:

Sure.

Tyler Emrick:

Pick your reason.

Walter Storholt:

Or dream location.

Tyler Emrick:

Yes, dream location. Or, “Hey, I want a ranch style.” I think about my parents. My dad’s in a house, he’s in an old farmhouse. Restrooms are upstairs, bedrooms are upstairs. Hey, it’s not really a conducive place for him to age, so the question becomes is, well, hey, are we going to maybe make a move? So there can be a lot that drives it. But the first question that I get all the time, Walt, is, “Can I get approved for a mortgage? I’m not working. I don’t have a paycheck.”

Walter Storholt:

Oh yeah, because you don’t have an income. “Send me your W-2.” You don’t have one of those anymore.

Tyler Emrick:

Correct. No, no, absolutely. So I wanted to talk about this situation a little bit and how we think through it.

And the first thing, anytime we’re going through a big change like this is we really want to take an inventory of, well, what are your options for purchasing or downsize, or purchasing that home? And what I mean by options is, well, hey, do you have enough cash to finance it yourself? Hey, great situation. You don’t have to sell your home first. You can put an all-cash offer in. You can have an easy close. You don’t have to worry about selling your second home in a timely fashion or anything like that. But not everybody has that much liquidity available to just go through.

Then you start looking at, well, hey, do you have a home equity line open on your current residence? We have a lot of retirees that have their current primary residences, they’re paid off. One of the things that we talk about with them is, well, hey, does it make sense for you to have an open line of credit, basically a home equity line of credit, which is what that is, against your current residence. And if no one’s ever heard of a HELOC, it’s essentially, hey, you have an open line of credit where you have a checkbook where you can literally write checks against the equity on your house. Sometimes these home equity line of credits can go up to upwards of 70% to 80% of your home’s value that you can get. A lot of times, they’re capped at about a half a million bucks. But you can have these things open, and if you have that available, well, hey, that’s money that you can get to put down towards that downsizer, that home that you’re looking for.

Some individuals that have a lot of assets that are outside of retirement accounts, we can look at financing against those assets. We call those asset-backed loans. Fancy terms are box spreads. I mean, there’s all sorts of things that you can do if you have taxable assets where you can borrow against them, which is just like borrowing against your house, Walt. Hey, it’s an open line of credit that you can access cash flow to get to.

Certainly we can look at a traditional mortgage. Hey, I will look at a traditional mortgage. We’ll just go under underwriting. We’ll get approved for it. And this is where that whole, “Hey, I’m not working. Am I going to be able to be approved for a mortgage?” So when you go through underwriting to purchase a home and finance it, what the underwriters are going to look at… Now, a lot of banks are different, but they’re looking at some core things. How much money is coming into you on a month in, month out basis? Social Security, pensions all count towards that.

The other thing that they look at are IRA distributions. So any money that’s coming out of your individual retirement accounts would be considered income, potentially, towards that underwriter to help you qualify for the financing that you need to to get that loan. A lot of times, the way they look at it is they look at the monthly distribution amount that you have and they look at your account balance. And as long as you have about three years’ worth of distributions in there, they’ll consider that as income. Now, some lenders might have a little different quirks and ways that they look at, but generally speaking, that’s a good rule of thumb.

So if you’re talking to your real estate agent, you’re talking to a lender and you’re saying, “Hey, I got this budget in mind. Would I be able to get approved for it?” They’re going to look at that social, they’re going to look at pensions, and then maybe they’re going to look at, “Well, that’s what I live off of. I don’t have a monthly distribution from my IRA set up. Well, how much would I need to have come monthly from IRA to get approved for it?” And then you could set that up monthly and then turn it off after the process and after closing and things like that. So that’s one unique way to where, “Hey, I don’t have assets I can borrow against. I don’t have just enough money in taxable brokerage accounts to pull from to pay cash. I need to get financing.” You certainly can continue to get financing that way. Same thing goes for a home equity line of credit.

So those are wonderful ways to think about and take an inventory of before you start that process to see how much money could you get, what are options available to you to get it?

Speaker 3:

What would your life look like if you designed it around your true wealth? It’s a powerful question and one that True Wealth Design helps individuals, families, and business owners answer every day. With a fully integrated approach to financial planning, tax strategy, investments, and business advisory, their team can bring clarity and confidence to every part of your financial life. Take the first step toward a stronger financial future with a no cost, no obligation discovery meeting. Just click the link in today’s show description to get started.

Walter Storholt:

Okay. All that makes sense. I mean, you’re really doing a lot of the same evaluating of when you were buying and selling homes during your working life, but-

Tyler Emrick:

You are.

Walter Storholt:

… that income piece is just where they’re, “Okay, we may have to get a little bit more creative with where we’re pulling, how we’re pulling it,” those kinds of things. But it sounds like where there’s a will, there’s a way.

Tyler Emrick:

Absolutely, yeah. We can absolutely work around it. And when I have that home equity line conversation too, a lot of families like, “Wow, I didn’t really think about it that way.” Because you can open up a home equity line of credit. Some banks will. If you have a checking account with it, they’ll cover the cost, or maybe it’s a hundred bucks. So when you look at these situations that potentially come up for liquidity needs, having access to that can be very beneficial depending on the circumstance and what you’re looking at, for sure.

Walter Storholt:

In our intro, you mentioned the word structure, like how you structure it being even more important than just the bottom line mortgage rate number.

Tyler Emrick:

100%.

Walter Storholt:

Can you explain that a little bit more?

Tyler Emrick:

I can, yep. Let me do it in the form of the second scenario that we’re running from.

So let’s go and look at it and say, “All right, I’ve done some of that analysis and I have to get the financing route.” Now, this could be for a downsize, this could be for a second home. There’s some little differences there, but we’ll talk about a little bit throughout the thing, but I wouldn’t get too hung up on, “Hey, is this a second home or a primary residence and I’m going to sell it?” We’re just in this scenario where I need to get financing, what do I need to do?

And as with anything, Walt, the first thing that we want to do, or at least I think a financial advisor should be helping you with is if you’re even getting to this point of, “Hey, I want a second home. Hey, I want to downsize,” the first thing that we need to take a look at is how does it fit within the structure of your financial plan? Let’s talk through what the plan could support budget-wise. Can you get a house in that budget? How high are you comfortable going up in the purchase? Is the budget $300,000, half a million, a million? Whatever it might be, getting that budget outlined from a plan support standpoint I think is very, very important.

The second thing I think your financial advisor should be looking at is, if we’ve got our budget set, well, what options are available to us from a liquidity standpoint? We talked about a few before. Hey, do we have a home equity line of credit that we could tap in? Can we borrow against our assets?

The other one would be, hey, how much could I pull from my accounts without messing up my taxes? Could I pull 100,000 bucks out of my IRA account and not mess up my IRMA and go too high, not bump into the next tax bracket? And if I can do that, how long can I consistently do that without messing up my tax situation? What I mean by that, Walt, is, hey, if you buy a home that’s half a million bucks, but you’ve only got $250,000 of liquidity that you can put down towards it, maybe you have to get a $250,000 mortgage to make up that gap. But then within the plan, how quickly could you pull money out of your retirement accounts to, quote unquote, pay that off? Could you get very aggressive with how much you’re putting towards that mortgage over the next few years and say, “Well, I couldn’t outright buy the house, but with what I’m getting from the house I’m selling or with what I got from my assets, I could realistically have it paid off within four years”? And you go into it with that mindset.

Make sense?

Walter Storholt:

Yeah. You don’t have to think about these things in 30-year timelines necessarily.

Tyler Emrick:

100%. And I think that has to be step one because when we start getting to your point about what do you mean by this structure, when we have interest rates as high as they are, understanding that first part will help us choose what type of financing that you want to go with. Because it’s not always like, hey, this loan has the lowest interest rate, that’s the one that I’m going to do. There are a multitude of different loans that you can get and financing that you can get when purchasing a home.

There’s the traditional 30-year, 15-year fixed interest payment. Those are the ones that obviously I think most listeners probably run into quite a bit. Hey, you get a 30-year loan, fixed rate, the rate stays the same. You know what your payment’s going to be. Sure, your property taxes are probably going to change over time, but outside of that, hey, you at least have some type of guarantee on what that payment’s going to look like, or at least some reasonable expectation of what that payment’s going to look like.

But if you’ve done your planning all the way up to that first part and you’re like, “You know what? I can get this thing paid off in three years.” Well, then why do we need a 30-year loan? Or why does it need to be a fixed rate? Maybe we could go with an adjustable rate mortgage that’s locked in for seven years. If you’re going to pay it off within three, you have very little risk of that rate going up because you’re going to have the house paid off by that time. And maybe you can get a lower rate on an adjustable rate mortgage and save yourself on some of that interest cost over the next few years.

But you got to know how much you can get and how quickly you’re going to be paying that off to understand, well, what’s the risk of a loan like that? Because, hey, if you get a seven-year ARM, that fixed rate is adjustable after that seven years. So then, hey, you might be at the whims of whatever interest rates are at that particular point in time down the road. So it helps you talk with your mortgage broker and understand what types of loans are giving the best deals right now? Am I getting a much, much lower rate if I take on the risk of a variable rate loan? And hey, if you’re going to pay it off, then maybe that’s not a risk in your particular situation.

Same thing goes for points. All the time, I’ll talk to families. As we’re starting down this path, maybe they have a bank that they have a good relationship with, and then the bank goes in and we’ll get a quote mortgage from them and they’ll just quote down the rate. And I’ll always ask, “Well, hey, what’s the closing cost for that interest rate?” Because closing costs, you can buy points. So I’ve seen loans where their closing costs range from $20,000 that you have in closing costs all the way down to where the bank pays you at closing. And the interest rate that that loan is going to get is very dependent on what those closing costs are going to be.

Again, well, how does this even fit? Well, going back to that planning side at the beginning, well, how long do you expect to have the loan for? How aggressive are we going to get paid down? What’s within the plan’s flexibility? Well, why would we care so much about a rate that’s the lowest if you’re going to pay it off in a few years, but you got to pay 20 grand to get that lower rate and closing costs? So understanding all those aspects of not only the interest rate of the loan, but what are some of those costs that are associated with getting that loan, and how does that line up with your expectations on how you’re going to be repaying it and paying it off, right?

Walter Storholt:

Yeah. It’s that breakeven point that you’ve traditionally heard talked about maybe in that decision-making, but you’re saying there’s a few other variables that may shift that breakeven point in retirees.

Tyler Emrick:

100%. 100%, but you have to have a very good understanding of what’s possible, how am I going to pay for this, what’s doable within the plan, what does my tax situation allow for me, for you to really get down into the nitty-gritty and be able to say, “Yeah, I’m comfortable with a seven-year adjustable rate ARM because it’s a percent lower and I’m going to pay it off within a few years, and I’m going to go with this bank over that bank because their closing costs are half the price,” or whatever. As opposed to, I think a lot of families will get very fixated on, “Well, what’s my rate? That’s the best rate,” and lose sight of these other two things.

Which when I think about mortgages and how they fit in the plan too, another concept that I’m talking about a lot is this idea of recasting the mortgage as well, which really, unless you’ve been through a situation where you needed to do it, it’s not very well-publicized and not every loan allows you to basically do a recast.

But let’s paint the picture here, Walt, right?

Walter Storholt:

This is not refinance. This is a little different.

Tyler Emrick:

This is a recast. You got it. Yep.

So let’s say, hey, you downsized, you still have your primary residence, you purchased a new home, and you’re waiting on your primary residence to sell. It hasn’t sold yet. And when it sells, you’re going to take that money that you get from selling the house, and ideally you would like to use it to pay down your current mortgage on the new place. Maybe you just use the mortgage to help you until you sell your primary residence.

So what a recast allows you to do is it allows you to pay a fixed fee. Normally, it’s a few hundred bucks, somewhere right around there, depending on the lender. And when you have that big chunk of money, what they’ll do is they will re-amortize your loan and treat it like, “Hey, let’s run through the scenario. You got a half a million dollar mortgage, you took out that mortgage, now you sold your old house and you got 250,000 bucks that you want to put towards that half a million dollar mortgage to pay it down.”

When you recast, you take that 250, now the bank looks at it and says, “All right, you no longer have a half a million dollar loan. You have a $250,000 loan. Let’s recalculate the payment. Let’s lower it over the term that’s left.” So your actual payment would go down in conjunction with you making that $250,000 payment towards the mortgage.

If you don’t recast it or if your loan doesn’t have the ability to recast, you would find yourself in a situation where, hey, that would go towards your principal, but it wouldn’t change your payment. So you wouldn’t keep-

Walter Storholt:

Gotcha.

Tyler Emrick:

… up with that high payment.

So when you’re looking at lenders and financing, understanding, well, what are my options with my loan? Can I repay it? Can I recast at some point down the road when I sell my primary residence? Or as I pull money out of my IRA over the next five years to pay this down, can I take a hundred grand, recast the loan, and go down from there over the course of time? Or whatever the case is.

So understanding some of the ins and outs around the financing I think is very important. And as you think about how high rates are right now, we’re looking at opportunities we can to save in cost, closing costs, save in interest rates, maybe an ARM versus a fixed loan, and develop a pay-down plan maybe a little more aggressively than what we traditionally would when interest rates were in 2.5%, 3%. And nobody was paying down their mortgage because you were getting more than that on a money market. So the strategies change-

Walter Storholt:

Makes sense.

Tyler Emrick:

… when those interest rates are higher.

Walter Storholt:

If you can get a couple of these wins in your quarter, then they really pile up.

Tyler Emrick:

Oh, 100%. 100%. And really even just having the conversation, I love these conversations because when we start going down this route with families, it’s like, “What’s possible? What can I do? I didn’t even think if I could do that.” And when you start structuring in and throwing some of these options, I think then you’re really getting down to the crux of, well, hey, how are you using your wealth and how is it impacting your life and what you’re trying to accomplish? Which is where I want to end up at.

We talked a little bit about, hey, retirees, their situation, second home downsizing, some points that we needed to consider there, but what I also run into quite a bit and I wanted to finish off with is I see it all the time where parents want to help out their children. Maybe it’s a first-time home. They see how big these interest rates are. They see how big down payments are and need to be, how high housing prices are, and they want to help their children get a start in that. And they’re asking us and coming to us saying, “How can I do that?”

So we have quite a bit of conversations with families around gifting to children and helping them towards loans. So that is absolutely possible. You don’t have to co-sign on the loan with your child a lot of times just to help them get it. Maybe it’s helping with the down payment. You can gift. I mean, we can gift $19,000 a year per person to any one individual. You can set up a family loan and you can be the bank for your children. There’s all sorts of these opportunities that are afforded to you to help your children get into that first-time home and get their life started and going from there. So looking at that and saying, “Well, how much can I gift? What types of investments should I gift, cash or securities? And hey, maybe I’m the bank. Maybe I give them a loan inside of a family loan,” are all possibilities to be able to help out your children as they get started.

So I wanted to throw that in there. It’s possible. Certainly if that’s on your mind, give us a call. Happy to talk through it. You got a bunch of planning options that are available to you if you find yourself in that boat to help your children in these higher interest rate environments.

Walter Storholt:

Yeah. I’ve heard people be just very afraid of having a mortgage in retirement, but sounds like the message today is to don’t view it that way. There are ways that you can use a mortgage to work for you in lots of ways, or at least make it so that it’s not as scary of a proposition when you’re on that fixed retirement income and no longer have those paychecks coming in.

Tyler Emrick:

The conversations change when you start saying, “Yeah, your rate’s at 7.5%, 8% compared to a few years ago.” And I was like, “Oh, 3%. Okay, I would feel a lot more comfortable with a mortgage at 3%, 3.5%.” But the question being-

Walter Storholt:

We got to be a little more strategic now.

Tyler Emrick:

Yes, absolutely. Well, can we get there, how do we get there, and what’s possible I think is really the conversation to drive around it.

Walter Storholt:

Yeah, it’s huge. Hugely important.

Well, this is just one of the elements of financial planning that Tyler and his team at True Wealth Design walk clients through each and every day, building these plans, making sure that you’re well-prepared for your retirement years and everything that comes along with building a solid financial plan.

If you’re interested in exploring what that relationship looks like, you can book a 20-minute discovery call, see if you’re a good fit to work with one another. The way to do it is just go to truewealthdesign.com and look for the Let’s Talk button. Or, we made it easy on you, in the description of today’s show, whether you’re watching on YouTube or listening on your favorite podcasting app, just look in the description or the show notes section and you’ll find a link where you can also schedule that 20-minute call, see maybe some gaps that might be in your plan right now, have that initial conversation, and then take it from there. Again, just check that out at truewealthdesign.com or in the link in the description of today’s show.

Tyler, great episode today. Thanks for talking mortgages, and we’ll talk again soon.

Tyler Emrick:

It was fun. We will.

Walter Storholt:

All right, take care. That’s Tyler and Walter. We’ll see you next time right back here on Retire Smarter.

Speaker 4:

Information provided is for informational purposes only and does not constitute investment, tax, or legal advice. Information is obtained from sources that are deemed to be reliable, but their accurateness and completeness cannot be guaranteed. All performance reference is historical and not an indication of future results. Benchmark indices are hypothetical and do not include any investment fees.