Should you carry a balance on your mortgage loan when you reach retirement age? Or should you do all that you can to pay off that housing debt early, before you leave the workforce?

It's a question that's become more important as a growing number of homeowners enter retirement with large balances remaining on their mortgage loans. And not surprisingly, there's no clear answer: Homeowners need to look at their individual financial situations before deciding whether paying off their mortgage loan early makes sense.

"Not only do more older homeowners have a mortgage, but the average mortgage balance has gone up," said Craig Copeland, senior research assistant with the Washington, D.C.-based Employee Benefit Research Institute. "If you have a large expenditure such as a mortgage all through your retirement, it's hard to adjust your other expenses. The mortgage debt is a payment you are stuck with. If you don't pay it, you lose your home. And if you lose your home, you're in an especially difficult spot if you're older."

A growing problem?

Mortgage debt is generally considered good debt. That's because the interest rate attached to this debt is usually so low. But what about when you move into retirement? Can mortgage debt after you leave the workforce become a burden?

A spate of recent studies suggest that it can, and that mortgage debt is making it more difficult for a growing number of retirees to pay their bills each month.

The AARP found that as of December of 2011 about 600,000 mortgage loans held by homeowners 50 or older were in foreclosure. Payments on another 625,000 of such loans were 90 or more days late. AARP says that from 2007 to 2011, more than 1.5 million older Americans lost their homes because of the mortgage crisis.

AARP found, too, that among mortgageholders 50 or older, the percentage of mortgage loans that are seriously delinquent rose 456 percent from 2007 thorugh 2011.

What's behind this? Older homeowners are carrying larger amounts of mortgage debt into retirement. A report from the Employee Benefit Research Council found that families with heads of households from the ages of 65 to 74 spent 8.6 percent of their income on housing debt payments in 2010. That's up from 5.6 percent in 2004.

The Consumer Financial Protection Bureau reported in May of 2014 that about 4.4 million retired homeowners had mortgage debt. The percentage of homeowners 65 and older who are carrying mortgage debt rose from 22 percent in 2001 to 30 percent in 2011. This has had a big impact: The Consumer Financial Protection Bureau reported that in 2011, older homeowners with a mortgage spent a median amount of $1,257 a month on housing expenses, while their counterparts with no mortgage spent a median amount of $434 a month on housing-related costs.

The big question

That begs the big question: Should you pay off your mortgage debt early to make sure that you don't have to make monthly payments after retirement?

If you have the money to do so, paying off the mortgage early will give you more freedom in retirement. You won't have to devote a portion of your fixed income to mortgage payments. But if you also have to pay down debt with higher interest rates -- such as credit-card debt -- it makes sense to pay that debt down first.

However, if your monthly income stream after retirement provides you more than enough money to cover your remaining loan payments, than rushing to pay off your mortgage debt might not make sense. If you've saved enough money to cover your retirement years, you might have enough leeway to boost your monthly mortgage payments after retirement to pay down that housing debt in a year or two after you leave the workforce.

If you can't afford to pay off your mortgage loan early, and you have to enter retirement with mortgage debt, you need to plan for that debt. Meet with a financial planner or accountant to determine how much money you'll have each month after you make your monthly mortgage payment. You might even decide to work part-time after retiring from your full-time job; if you do you can use some of this income to help cover your monthly mortgage payments.

The best time to start worrying about mortgage debt is long before you reach retirement age. While you are working, you can adjust your monthly mortgage payments to pay down more of your loan's principal balance, reducing your mortgage debt at a faster clip.

And if you are resigned to entering your retirement years with mortgage debt? Know that you are not alone.

"I see this trend only increasing," Copeland said. "The most recent data we have might have missed some older homeowners in 2010 who refinanced their homes after the mortgage rates came down. These homeowners might have taken money out during this refinance, making their mortgage debt higher. I would anticipate in the next few years seeing even a larger percentage of older homeowners entering their retirement years with mortgage debt."

Published on May 8, 2013