Multiple mortgages complicate retirement plans


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Dear Senior Living Adviser,
I am a civil servant eligible to retire next year. I’m 63 and my wife is 59.

We both plan to wait until our full retirement age (66) to file for Social Security benefits.

When I retire next year, our annual income will drop about $70,000 per year to around $60,000. The issue is what to do with our mortgage debt.

In 2006, we took out a home equity line of credit, or HELOC, to start a business. The business failed during the financial crisis, and we sold it for pennies on the dollar in 2009.

We have a $170,000 first mortgage at 4.625% with 22 years remaining and a $230,000 HELOC balance at prime plus 0% for the life of the loan.

Our home is currently appraised at $370,000, so we’re $30,000 underwater. The HELOC payment will switch from interest only to amortizing next year, with the monthly payment jumping to around $2,300 per month. We’re currently paying $1,000 per month on the HELOC, which is the interest expense plus some principal repayment.

I’m hoping for some advice. I was thinking of either:

  • Cashing out my Thrift Savings Plan to pay off the HELOC. I have about $345,000 in the savings plan and another $45,000 in IRAs.
  • Applying for a Veterans Affairs loan and coming to the table with $30,000 cash. I’ve been told that I can get a 4.25% rate and finance 100% with a VA loan.
  • Selling the house and coming to the table with cash. My wife and I really like our house. We have been there 22 years, and our 4 kids all grew up there.

The bank is willing to switch to a 4.99% fixed rate and 20-year amortization on the HELOC.

Even if we change the terms, our total house payments on the first mortgage and the HELOC will be close to $3,000 per month. That’s a little rough on our expected $5,000-per-month retirement income. What’s a retiree to do?

— John Juncture

Dear John,
It doesn’t sound like you’re all that interested in selling the home. You don’t have any equity in the home, you’ll have to bring cash to closing and you’ll have to find a new place to live. There’s nothing wrong with aging in place, if that’s what you decide to do.

Cash to closing is going to be a common refrain. The only option that doesn’t require that is converting the HELOC to a fixed-rate loan with a 20-year amortization.

I like the VA loan option. It doesn’t require mortgage insurance, although it does have a funding fee. At 4.25%, you’re getting a lower rate than you have on your existing first mortgage, and it’s 0.74% lower than the fixed rate on the HELOC conversion.

A 30-year loan isn’t going to minimize your total interest expense, but it does bring down your total monthly mortgage payment, which was your primary concern in retirement.

I’ve put together a table showing the different mortgage options. You can use Bankrate’s mortgage calculator to put a finer point on things when it comes to your actual finance options.

Mortgage options

1st mortgage HELOC VA loan Repriced amortized HELOC Amortized existing HELOC
Loan balance 1st mortgage: $170,000 HELOC: $230,000 VA loan: $370,000 Repriced amortized HELOC: $230,000 Amortized existing HELOC: $230,000
Interest rate 1st mortgage: 4.625% HELOC: 3.25% VA loan: 4.25% Repriced amortized HELOC: 4.99% Amortized existing HELOC: 3.25%
Remaining loan term (months) 1st mortgage: 264 HELOC: interest only VA loan: 360 Repriced amortized HELOC: 240 Amortized existing HELOC: 120
Mortgage payment 1st mortgage: $1,027.30 HELOC: $622.92 VA loan: $1,820.18 Repriced amortized HELOC: $1,516.63 Amortized existing HELOC: $2,247.54

While not having a mortgage in retirement is a sound financial goal, I can’t advocate cashing out your retirement savings to make that happen. You need to preserve a measure of financial flexibility in retirement. Take out what you need to get the VA loan.

I suggest working with your tax professional to decide which distribution choices minimize your tax bill. It’s going to be easier to get this refinancing done while you’re still working. I think you should at least consider a 15-year VA mortgage instead of a 30-year loan. You’ll get a lower interest rate and have the house paid off before you’re 80.

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