Borrowing in retirement not necessarily a bad thing

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Many retirement plans assume you’ll have a paid-off place to live by the time you stop working. But not everyone can -- or should -- be mortgage-free in retirement.

For some, mortgages are a necessary part of acquiring housing. For others, they’re a smart tool for maximizing cash flow.

In 2009, about a third of the households that were headed by someone age 65 or older and owned a home also had a mortgage, according to the Census Bureau’s American Housing Survey.

The mortgage process is the same at any age. If your income and credit score qualify you for a loan, the bank can’t turn you down because of your age.

Your expected life span doesn’t matter, either. A borrower can take out a 30-year mortgage at age 90 as long as he qualifies for the loan.

Plan to show the bank pay stubs if you’re still employed.

If you’re already retired, you’ll need a pension or Social Security award letter as well as retirement account statements and income tax returns.

Consider your post-retirement income to make sure you can afford the house both now and after you retire.

Choose your mortgage size and term in light of your age, health and financial goals.

If you’re relatively young and hope to eventually pay off the property, a larger down payment and shorter mortgage term -- 15 or 20 years, for instance -- might make sense. If you plan to live in your home for a long time, you might also lower your interest rate by paying points at closing.

A sizable down payment and shorter mortgage term might also be a good choice if you hope to leave substantial equity to your partner, children or estate. A 15- or 20-year mortgage builds equity much more quickly than does a 30-year mortgage.

For some retirees, however, managing cash flow is more important than building equity.

Smaller down payments and 30-year terms might serve these borrowers better. The combination builds equity slowly but frees up assets to fund other routine expenses.

Depending on the individual’s tax situation, a mortgage may even be a smart cash-flow tool for someone who doesn’t technically need a mortgage.

Consider a retiree who sells a large home for $500,000 and buys a smaller one for $200,000. She could pay cash for the smaller home.

A mortgage, however, could let her invest extra money, give her a liquid financial cushion or make it easier for her to pay monthly bills.

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