Many people’s biggest career goal is to “pay off the mortgage,” assuming that without a mortgage, there will be no financial pressure in retirement and more money to enjoy. However, this is actually a major blind spot in retirement financial planning. Even if the mortgage is paid off, the house remains an asset that continuously consumes cash flow.
Therefore, how to make good use of the “net value of real estate” is an important topic in retirement finance. It could be a lifesaver for retirement and one of the biggest protections for enjoying the golden years.
In fact, data from the Harvard University Housing Research Center shows that in 2023, among homeowners aged 65 and older who have completely paid off their mortgages, about 19% of households still have housing expenses exceeding 30% of their income. In other words, about one in every five retired homeowners without a mortgage still faces heavy housing pressure.
Therefore, even with the mortgage paid off, when retirement income shifts from “active salary” to “fixed passive income or retirement benefits,” the burden of housing costs may exceed our expectations.
Especially in today’s world with natural disasters and rising prices, there are seven reasons that could make some retirees feel like they can’t afford their homes:
Clearly, even after paying off the mortgage, local governments still levy property taxes annually, regardless of whether there is a mortgage or not.
Moreover, when property values rise or local governments reassess or adjust tax rates, property taxes could increase. While income may rise with inflation for working families, retirees’ income growth is usually limited. Therefore, the proportion of property taxes to income may increase year by year.
There is another situation where many people used to have property taxes in an escrow account linked to their mortgages, paid monthly along with the mortgage. After the mortgage is paid off, homeowners must directly pay a large tax bill every six months or annually, leading to a misconception of “Why do I have to pay so much when there’s no mortgage?” The Consumer Financial Protection Bureau (CFPB) also reminds that even without an escrow account, property taxes and insurance still need to be paid.
Escrow accounts are managed by mortgage servicers to handle mortgage and tax payments separately. Therefore, while the escrow account closes when the mortgage is paid off, property taxes and insurance still need to be paid separately.
Although banks usually don’t require homeowners to maintain insurance after paying off the mortgage, not having insurance means that the homeowner is solely responsible for major losses such as fire, windstorms, or other disasters. Therefore, most retirees still cannot easily cancel insurance policies.
Nationwide studies by the U.S. Treasury Department show that from 2018 to 2022, home insurance premiums increased on average by 8.7% faster than inflation. Homeowners in the top 20% climate risk areas pay an average premium of about $2,321, 82% higher than those in low-risk areas, and are more likely to face insurance companies refusing to renew policies.
Some regions also require additional insurance such as flood insurance, windstorm insurance, earthquake insurance, or state government high-risk insurance plans. Therefore, even a house without a mortgage may become increasingly unaffordable due to the heightened climate risks in the area.
One of the biggest misconceptions in retirement is thinking that paying off the mortgage means a worry-free retirement. The cost of housing in retirement can be shocking when fully analyzed. Optimizing retirement life by utilizing “home equity” effectively can offer relief in emergencies, healthcare, renovation, and other unexpected expenses.
The regularity of mortgage payments and insurance is well known, but maintenance costs often arise unexpectedly. After living in a house for most of one’s life, retirees may have to deal with expenses such as roof replacement, air conditioning upgrades, plumbing or electrical system upgrades, foundation repairs, window and door repairs, or major renovations in the kitchen and bathroom.
These repairs are not only costly but usually require a lump sum payment of thousands to tens of thousands of dollars. During their working years, individuals can slowly replenish savings with their salaries. However, in retirement, without a fund set aside for repairs, retirees might be forced to sell stocks, withdraw from IRAs, use credit cards, or even leverage home equity loans to access funds. The house, originally debt-free, may end up being used as a borrowing tool again.
When calculating the cost of homeownership, the U.S. Census Bureau includes not only mortgage payments, property taxes, and insurance but also utilities like electricity, gas, fuel, water, and some related expenses.
Furthermore, apartments, retirement communities, and some detached homes incur various fees like Homeowners Association dues or condo fees. In 2024, around 21.6 million U.S. households paid HOA or condo fees, with a median monthly fee of $184 for homeowners without a mortgage, totaling around $2,208 annually.
Moreover, some communities may unexpectedly impose special assessments, such as for roof or exterior renovations, elevator maintenance, increased community insurance fees, pool renovations, or additional fees due to insufficient HOA reserves ─ none of which are waived just because residents have retired or paid off their mortgages.
Another scenario is a decrease in household income. For example, a family with an annual income of $120,000 during working years paid $24,000 annually for property taxes, insurance, utilities, and maintenance, accounting for 20% of their income.
After retirement, the family’s income drops to $50,000 annually, and even though housing expenses remain at $24,000, the percentage immediately increases to 48%.
Harvard studies show that in 2023, among households aged 65 and older, 34% had housing expenses exceeding 30% of income. The burden is particularly dire for elderly households because after the age of 80, the median income decreases, and single-person households increase.
Retired couples may have had two Social Security incomes, two pension incomes, or multiple sources of income. After one spouse passes away, expenses generally do not halve, but total income may significantly decrease. Property taxes, insurance, roof repairs, and air conditioning maintenance do not decrease just because there is only one person living in the home.
Retirees often hope to age gracefully in their homes; however, houses suitable for those in their fifties or sixties may not be suitable for those in their eighties or nineties.
As individuals age, their health deteriorates, and they may need additional modifications like ramps, stair lifts, bathroom grab bars, barrier-free showers, widened door frames, a ground-floor bedroom, slip-resistant flooring, or space for in-home care.
Moreover, as individuals age, they may no longer be able to handle tasks like mowing the lawn, shoveling snow, cleaning gutters, or addressing minor repairs on their own, necessitating hiring services. Harvard research also indicates that with increasing age, the need for home services and accessibility modifications adds to the housing burden.
This is the biggest contradiction in retirement real estate: having a mortgage-free house worth $800,000 but only $20,000 left in the bank account.
Home equity is an asset, but it cannot be used directly to pay property taxes, medical bills, or daily living expenses. Unless homeowners are willing to sell the house, move to a cheaper area, apply for a home equity loan, reverse mortgage, etc., to extract money from the property, retirees may have significant assets on paper but fragile cash flow, known as being “House-Rich, Cash-Poor.”
After considering the seven points above, retirees should not just ask, “Is the mortgage paid off?” but rather calculate: Annual homeownership costs = property taxes + all insurance + HOA fees + utilities + regular maintenance + funds for major repairs + necessary home services and renovation costs.
Next, use: Annual homeownership costs ÷ after-tax retirement income to gauge whether the property expenses are truly affordable. Housing costs exceeding 30% of income are generally seen as burdensome for households. However, retirees also need to retain flexibility for medical, long-term care, and emergency expenses, so just being “slightly below 30%” does not necessarily imply safety.
Therefore, paying off the mortgage only means owning the house; continuing to live in it still necessitates continuous cash flow. The real struggle to afford housing in retirement is often not because of outstanding debts to banks but due to stagnant income, increasing property taxes, insurance, maintenance, and caregiving costs.
Here are some strategies to optimize retirement finances by utilizing home equity, which may prove beneficial in emergency healthcare payments, long-term care, property repairs, and unforeseen expenses. Don’t let the house be just a place of residence but a locked asset that immobilizes your financial flexibility.
Although paying off the mortgage does not necessarily mean immediately utilizing the home equity, for retirees, it serves more as a housing security, emergency backup fund, and legacy asset reserve.
I will divide the strategies into two parts: one is “staying in the current house,” and the other is “moving to a new residence.”
First, for those opting to “stay in the current house,” you can consider methods like “Home Equity Loan,” “Home Equity Line of Credit (HELOC),” or Reverse Mortgage to access retirement funds.
A home equity loan is suitable for obtaining a large sum of money at once, using the home equity as collateral, receiving a lump sum, usually with a fixed interest rate. The money can be used for home repairs, healthcare expenses, while the remaining funds can be put into stable investments to earn passive income. However, it’s essential to ensure timely monthly repayments.
A Home Equity Line of Credit, also secured by the property, provides a revolving line of credit rather than a full loan payout. For instance, if approved for a $150,000 limit, you could borrow $30,000 for a roof replacement the following year and $20,000 two years later for medical expenses. This type of loan typically calculates interest based on the actual balance used and often carries a floating interest rate. Therefore, be mindful that once in the repayment period, monthly payments may increase.
Reverse Mortgage is especially suitable for retirees who prefer not to move and want to age in a familiar environment but lack a steady cash flow. The term “reverse” refers to the usual mortgage payment process where the homeowner pays the bank monthly (forward); with a reverse mortgage, the bank typically disburses funds to the homeowner or provides a credit line, with the loan balance and costs accumulating over time.
Due to the characteristics of reverse mortgages, the homeowner’s debt continues to grow while the net estate value decreases. It’s not suitable for those planning to move in the near future.
Alternatively, aside from financing, renting out vacant rooms in the current home is an excellent way to increase retirement income. Even constructing additional accessory dwelling units (ADUs) in the backyard can provide independent living spaces for both the homeowner and tenants.
Secondly, for those choosing to move from their current residence, downsizing to a smaller house can yield a sizeable windfall by capitalizing on the price differential between the two properties as retirement funds. Simultaneously, this move significantly reduces property taxes, management fees, and future maintenance costs, offering a living environment more suited to the changing needs of elderly individuals.
Another option is “retiring while keeping the house”; if your property is in a prime rental location, you can rent out the original house and move to a cheaper rental in the suburbs or reside in specialized retirement homes or wellness communities. This way, you retain ownership of the property and future appreciation potential while utilizing the “rental differential” to easily cover living and care expenses.
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(Note: This article is for informational purposes only. The publication does not provide advice on investment, taxation, legal matters, financial planning, real estate planning, or other personal finance matters. For specific financial decisions, consult your financial advisor. The publication does not bear any investment responsibility.)