Mortgage Paid: Sell or Stay?
Paying off your home loan once meant lifetime security in familiar surroundings, but some older adults are considering other options
While home ownership has long been considered a component of the American dream, you don't truly own that home until you make the very last mortgage payment. Doing so, and finally being free from mortgage payments — and the fear that some life-changing financial situation could cause you to lose your home — provides an incomparable level of relief.
However, lifestyle trends are also changing, and some older adults are reconsidering the idea of paying off their home and living out the rest of their years in it. Maybe it's better to sell while you can get a great price. We talked to several experts to discover the factors you should consider before committing to one strategy or another.
You may have a larger home than you actually need, and if so, that's one reason to consider selling it. "Many people at or above the age of 50 have a home that they raised their children in — but those kids are now out of the home. Or perhaps it was used as a generational house for their parents," says Bret Ceren, a Realtor and associate broker at Platinum Living Realty in Scottsdale, Arizona.
Costs That Don't Go Away
He adds that the cost of maintaining a home that's larger than you need may outweigh the benefits. "Some people may choose to keep the home for sentimental reasons or because they can host relatives during the holidays or other special times," Ceren says.
You may have a larger home than you actually need, and if so, that's one reason to consider selling it.
But if you can afford to maintain a larger home and you want to stay in it, he recommends keeping it.
Maureen Murano, a financial advisor at Northwestern Mutual in Denver, says there are some things to consider if you want to stay in your current house and you're on a fixed income. "There's the potential for increased property taxes and HOA fees," she says. Also, Murano says you'll likely need to invest time and money in renovations and maintenance to keep the property up to date.
One option is to tap into your home's equity to get some cash to help maintain it. "Depending on your financial circumstances, home equity lines of credit or refinancing into a smaller loan can enable you to access a sizable portion of your home's value without selling," says Leah Dirks, president of mortgage and consumer lending at FirstBank in Denver.
The Temptation of Equity
Home equity lines of credit, also known as HELOCs, are a form of revolving debt, not unlike a credit card — you have a spending limit and you can borrow when necessary. However, HELOCs are second mortgages that use the equity in your house to make sure you repay money borrowed through the HELOC. If you cannot repay it, you could lose your home.
Jared Barnett, a real estate agent at Compass in New York, believes very strongly that homeowners should not sell their houses just because they pay off the mortgage. "Once you finish paying off your loan, you know you have the security of a place to live long-term, and you can begin to set aside funds for savings" and other things, he says.
If you need cash, he also recommends opening a home equity line of credit rather than initiating a sale. "This will allow you to borrow funds against your home's equity at a lower interest rate than a regular loan," Barnett says.
Yet another alternative is a reverse mortgage, which allows you to stay in the home and receive regular payments based on the equity you have in the property. When you die or move out of the house, you must repay the money you received, along with interest and fees. You or your heir may need to sell the house to settle that debt.
"If you are 62 years or above, you may have a situation where a reverse mortgage makes sense," says Jonathan Self, a real estate broker at Compass in Chicago. "The home-equity conversion mortgage is the most common type of reverse mortgage — and it is particularly noteworthy because it is insured by the federal government."
Avoid a Big Tax Bite
Don't forget Uncle Sam as you consider whether to sell your home. Mindy Jensen of Longmont, Colorado, who is the co-host of BiggerPockets Money Podcast and author of "First-Time Home Buyer," advises homeowners to be aware they may be liable to pay capital gains taxes on large profits from selling their homes. The tax kicks in on amounts exceeding $500,000 for married couples and $250,000 if you're single.
"While some people may want to keep their house and enjoy a lower cost of living, others may be planning their next phase of life, like retirement or investing in their adult children's financial future."
If a spouse dies, Jensen says the survivor can still use the late spouse's capital gains exemption, but only for two years. "Otherwise, it reverts back to the $250,000 for single people, which can create a bit of a dilemma for the recently widowed homeowner trying to decide to sell or stay," she says.
You may be considering selling your paid-off home for other reasons. "While some people may want to keep their house and enjoy a lower cost of living, others may be planning their next phase of life, like retirement or investing in their adult children's financial future," explains Murano.
Instead of leaving the home to your kids in your will, you may want to sell it and give them their share of the proceeds now. Or you may want to pay off bills, and then travel. "Another option is to sell the home and use the money to buy two smaller homes," Murano says. (Perhaps one home for you, and another home for your offspring.)
Ability to Age in Place
If you want to stay in your paid-off home, consider how well you'll be able to navigate it as you get older. "A big advantage of keeping your home is that you can continue to maintain established relationships and support, while having the ability to help extended family and continue living mortgage-free," says Murano.
However, the home needs to be "senior-friendly," warns Jensen. "I live in a split-level home right now — and there are stairs everywhere, so it's definitely not senior-friendly," she says. The main level does not have a bathroom, bedroom or laundry room, so she must walk up or down at least one flight of stairs to get to anything.
"A ranch-style house is best, but if your current house is easily adaptable to one-level living, that can be an argument for keeping it." Jensen says.
Options to Consider
In fact, Bill Golden, a realtor-associate broker at Keller Williams Realty Intown Atlanta, says it makes sense to stay in a home that you can live in without paying a mortgage or rent. "It also may make sense to spend some of your equity to make your home into a place that you can remain in," he suggests.
However, if the home has multiple levels, Golden says it may be better to sell your home and use that cash equity to buy something else that allows you to comfortably age in place.
Keep in mind that the ability to age in place may also be determined by your health status in the coming years. "Health care costs add up fast, and the cost of long-term care can wipe out an entire estate," warns Self. "It's best to have frank — and possibly hard — conversations with your loved ones about how to move forward in a way that benefits everyone."
And while long-term health insurance has costly premiums, Self says getting it could help defend your primary asset.
Generate Rental Income
Another alternative to selling your home is to turn it into a rental property.
"If your financial goals include building a real estate portfolio or having an investment property, consider keeping the home to generate rental income," advises Candice Williams, a Realtor at Coldwell Banker Realty in Houston.
"You can utilize remaining profits each month to cover the housing expenses of your new residence."
Depending on location and amenities, homes can generate substantial revenue as a vacation rental, she says. "Be sure to put some of the profit to the side for maintenance, insurance and taxes," she adds. "You can utilize remaining profits each month to cover the housing expenses of your new residence."
By choosing this option, you can continue to hold on to your property while it increases in value. "Some lenders will also count 75% of your rental income to help qualify you for a new loan if you want to upgrade or need financing for a new property," Dirks says.
However, she concedes that there are risks to being a landlord. "You may encounter unsavory tenants, surprise expenses and upkeep, as well as added wear and tear to your property," Dirks explains. But she adds that you can hire property managers to deal with tenants, collect rent and handle maintenance requests.
Finding a New Home
The decision to sell your home also includes a second and equally important second decision: Where will you live? After home prices soared to historical highs, the housing market is starting to cool off. Murano says you should always look at the market when deciding to sell.
"Ensure that your next move — whether to become a renter or purchase another home — does not expose you to a higher level of monthly living expenses that may put your finances at risk."
"Ensure that your next move — whether to become a renter or purchase another home — does not expose you to a higher level of monthly living expenses that may put your finances at risk," advises Williams.
And that's why it's so important where you decide to live. "Your paid-off house might net you a huge profit, but you may be paying almost that same amount for another house — trading the house you know for an unknown property," says Jensen. "And interest rates are the highest they've been in decades, so if you can't pay cash for your new place, you're trading no house payment for a potentially hefty one."
Retirees' Changing Tastes
According to Self, the broker in Chicago, the Sunbelt has long been the stereotypical enclave for relocating retirees, but homeowners are starting to face the harsh reality of buying property in hurricane-prone areas. One leg of his business involves connecting buyers to other agents in vacation home markets, and Self says he's noticing a trend.
"For example, a client might want to 'right size' into a cottage in southwest Michigan, so they rent the home during the high season and hop from kid to kid — helping with grandkids — with the cash flow from their home." When the tourist season slows down, Self says they return and host Christmas.
Also, before the pandemic, he says it was common to see empty nesters moving from the suburbs to live an active city life in single-floor condos. "The suburbs provided what they needed for a time," he says, "but by the time the nest has emptied and retirement calls, the common theme is a longing to never be in traffic again, to have a coffee shop that knows your name and a decent restaurant or two all within walking distance."
Don't Rush Yourself
Jensen says the decision to sell or keep your paid-off home should not be made lightly, and if you like your current home, she sees no reason to sell it.
"You know this house, the quirks it has — all houses have quirks — and how to navigate the home," she says. "Selling means learning a new house, figuring out its quirks, and hoping it's a good house."
Rachel Lustbader, a broker at Coldwell Banker Warburg in New York, says people often tell her they want to move. Her response is often to ask them where they're going.
"Monthly mortgage payments could be challenging for seniors who often live on retirement and investment income."
"Unless you are planning to downsize and the new home would cost less than you would net on the sale of the home you own, you will need to look at your financial situation to determine how much you can afford for the down payment and monthly mortgage payments," she says. "Monthly mortgage payments could be challenging for seniors who often live on retirement and investment income."
But according to Frederick Warburg Peters, a broker at Coldwell Banker Warburg in New York, whether you've paid off your mortgage or not should not be a consideration when deciding to sell your house or not.
"You don't make a life decision of this magnitude based on whether or not you still have outstanding debt," he says. "You make real estate decisions based on factors of lifestyle and comfort."
If you need more space, he says you should move. If you need less space, he says you should move. "But your needs are not determined by the size of, or lack of, a mortgage," he declares.