For many older homeowners, increasing mortgage debt is dulling the sheen on their golden years.
Approximately 33 million Americans over the age of 65 own their homes, making them the age group with the highest homeownership rate. But according to a study by the Consumer Financial Protection Bureau (CFPB) released in May 2014, that asset is quickly becoming a burden for many. From 2001 to 2011, the percentage of homeowners over the age of 65 carrying mortgage debt increased by 8 percent. The median amount this demographic owed on their mortgages also increased a whopping 82 percent, from $43,400 to $79,000.
Notably, mortgage debt nearly tripled—from 8.4 percent to 21.2 percent—for consumers in the over-75 age bracket.
“A home can be a place of security for older Americans in their retirement years—a roof over their heads as well as a valuable asset,” said CFPB Director Richard Cordray in a press release. “But as more seniors carry significant mortgages into retirement, they put themselves at risk of losing their nest eggs and their homes.”
What this means for today’s seniors
High monthly mortgage payments can compromise older Americans’ overall financial security. They may need to stay in the workforce longer than planned, and their overall net worth may take a nosedive because of a decrease in home equity.
Seniors may also have trouble making mortgage payments. When the recession hit in 2007, the number of seniors who defaulted on mortgage payments increased five times. And as delinquency rates increased for older Americans, so did foreclosures, which are particularly concerning for this age group because physical and mental ailments can make recovering from a major financial blow that much more difficult.
Additionally, seniors may find it difficult to qualify for a loan modification because of their lower income in retirement. This lower income, coupled with lenders’ increasingly restrictive income qualifications, means many older Americans will be denied loan modifications—even when they really need them.
“While retirees were employed, their incomes may have easily qualified for a mortgage,” says Alex Margulis, a private mortgage advisor at PERL Mortgage, Inc., in Chicago. “The issue now is that they may not be able to refinance or get purchase financing if they are on a retirement income. That has been the biggest shock to some in this situation.”
If you’re approaching retirement age and want to avoid paying a mortgage on a fixed income, consider these tips from the CFPB:
1. Make your mortgage pay-off date a part of your retirement plan. “If your goal is to be debt-free by retirement age, consider prepaying your mortgage on a term that would allow for that,” Margulis says. “Many of my clients prefer to obtain a 15-year fixed-rate mortgage. Not only is the interest rate lower compared to a 30-year but the term allows them to become debt free by the time they plan to retire.”
Set your mortgage payoff date to be earlier than your retirement so that you can eliminate mortgage payments from your budget during retirement.
2. Use caution when making a loan modification. If you want to refinance your mortgage for a lower interest rate or tap into your home equity, pay attention to the term of the mortgage. If you’re nearing retirement, it may not be a good idea to finance your home over a 30-year term. And if you tap into your home equity now, you will have less money available to pay for unforeseen expenses, should any arise in retirement.
3. Budget for a reduced retirement income. Consider that as you get older, you may have more expenses, such as those for healthcare and long-term care. If you plan on staying in your home, remember to budget for home modifications or upkeep in addition to your inflated health care costs.
Lara Levitan is a freelance writer and editor with more than ten years of experience writing about a variety of topics, from architecture to Zen Buddhism. She has served as the co-editor of the Remodeler’s Journal published by the National Association of the Remodeling Industry (NARI) and as the marketing coordinator at an award-winning architecture firm. Currently she is the literary editor for GapersBlock.com, a popular Chicago-based website. Lara is a graduate of the University of Illinois at Urbana-Champaign.