This is something that is normally not even on the average retiree’s radar… a new mortgage after you retire, how could that be good? I really enjoyed this eye-opening segment from Ric Edleman’s radio show, and it’s entirely possible I’ve bought it hook, line and sinker. A transcript of one caller’s conversation with Ric is below. Exactly how this might work for me is definitely something that will show up on my next pre-retirement spreadsheet. ~Bill
p.s. Ric Edleman, Financial Advisor extraordinaire ,not only has an easy-to-listen-to radio show but a great website as well.
Ric Edelman: Hey Nancy, welcome to the show. How are you?
Caller: Hi Ric, I listen to you all the time: love your show and your advice.
Ric Edelman: Well thank you.
Caller: But I’ve got a good question. I know how you feel about mortgages for young people — big mortgages — how about a big mortgage for somebody that just retired?
Ric Edelman: I think they’re even more important for retirees in fact than they are for younger folks. And I’ll tell you why. It sounds contradictory, doesn’t it? It sounds counterintuitive.
Caller: Yes.
Ric Edelman: Because a lot of folks in or reaching retirement say, “You know what? In retirement my income’s going to be less and I want to lower my expenses so that I don’t have the burden of having to pay that huge bill,” because that mortgage payment’s probably the biggest bill you write every month, you know, a thousand — thousands of dollars — and wouldn’t it be great not to have to pay that bill? So it’s not at all uncommon for retirees to say, “My goal is to pay off the mortgage by the time I retire.”
In fact I love the idea of retirees having a big mortgage, and here’s why. It’s because of the point we just cited: your income is less in retirement. Well, think about this. Let’s put it in your context Nancy: what’s the value of your house?
Caller: Five. Five-hundred.
Ric Edelman: If you’ve got a half-a-million dollar house and we were to get a mortgage on it today we could probably get a mortgage of about 4 percent — that’s the current 30-year fixed rate — somewhere about that.
Caller: Right.
Ric Edelman: Now at a 4 percent interest rate the monthly payment on that house is going to be somewhere around a couple of grand a month is what I’m guessing.
Caller: Okay.
Ric Edelman: Now we take the $500,000.00 — let’s pretend we get a 100 percent mortgage — we’re not really going to do that but let’s just pretend for conversation sake.
Caller: Okay, yeah.
Ric Edelman: We take the $500,000.00, we get a $500,000.00 mortgage: that means I have my $500,000.00 in my hip pocket. Now let’s assume that you earn no interest of any kind — none — which is of course absurd as well, isn’t it?
Caller: Right.
Ric Edelman: But even if you earn no interest of any kind you’ll be able to make the payment. So let’s assume here Nancy that you get a $500,000.00 mortgage — we’re not really going to do that — and we invest it and earn nothing: we just literally put the money under our mattress — even if you earn no interest of any kind you’ll be able to make that monthly mortgage payment for 16 years before you ran out of money. And all along the way for those 16 years you would have the half-a-million dollars available to you.
Now guess what happens if we invest the money and managed to earn an amount equal to what the mortgage is costing? If the mortgage is costing you 4 percent you’re going to be able to earn at 4 percent an amount equal to what the loan costs you and the $500,000.00 remains untouched.
Again, if you use the money — let’s say you end up spending $2,000.00 a month more than you’re earning on the investment you’re going to have that money available to you for 15 or 20 years. In other words it’s a liquidity issue. And I know what people are saying, sometimes they’ll say, “Oh, wait a minute. This is really scary. This is really risky because what happens if I in fact, over the next 15 years, do spend more than what it was earning?” What people are forgetting is that what do you suppose will happen to the value of the house over the next 15 or 20 years?
Caller: Right, it should go up, hopefully, and then you’ll have the tax write-off too, right?
Ric Edelman: Exactly. We’re ignoring the tax write-off, we’re ignoring the increased appreciation on the house, we’re ignoring the fact that you probably aren’t going to spend all that money over the time period — in other words having the mortgage means you get to keep your cash. And by getting to keep your cash you provide for yourself liquidity and flexibility that you otherwise would not have.
I’ll tell you the horror story in the opposite direction. We see this happening a lot. People who — we call them as ‘house-rich/cash poor.’ You’re familiar with that phrase.
Caller: Yeah, yeah, and that’s what I don’t — yeah.
Ric Edelman: And we see this happening all the time: we take a little old lady, she’s in her 70s or 80s, she’s lived in this house for 45 years, she raised her family there, the kids are grown, out of the house, her husband has passed away, she’s living on Social Security and a small pension, and she has no money: but the house is fully paid for. But she can’t afford the property taxes anymore because the property taxes have risen. She’s having trouble affording to pay for the heating and air conditioning bill. The home needs repairs, the roof is leaking and the air conditioning system needs replacing. Where is she getting the money to do that? She doesn’t have any money: but she’s got a half-a-million dollar house that she’s sitting on that they paid $50,000.00 for way back when.
Don’t become house-rich and cash-poor. That house is going to grow in value or not whether there’s a mortgage on it or not. And so what we simply want to recognize is that having a mortgage provides you with flexibility. It actually increases your safety, it reduces the risk that money will be a burden, and the small amount of interest rate that you have to pay for the privilege — that 4 percent loan — is well worth the peace of mind of having the money available to you should you ever need it. – original –
