A Mortgage Mistake for Many Retirees

In Retirement, often you need to look at things differently than you have in the past.  What was given nary a second thought during your working career, should be analyzed through another looking glass.

Case in Point: Escrow payments.

Before vs. After Retirement

In your working years, you buy a house and make mortgage payments.  A couple of times a year, big payments are due for property taxes and insurance (The -T- and the final -I- of “PITI” – Principal, Interest, Taxes and Insurance). Most of us don’t have the discipline to save up for those big bills, so the mortgage company estimates what we’ll owe, breaks up those payments over 12 months, and adds it into our monthly mortgage. Each month that extra money is put in our escrow account. When the bills come due, the mortgage company pays it.  

Of course the company holding our mortgage isn’t just putting that money in a safe, they invest it or loan it out. They make money on our money.

Now hold that thought for a moment and I’ll explain my mortgage mistake.

Is Escrow for taxes and insurance a mortgage mistake for retirees when buying a new home like this one?
Many retirees chose to move to a new home and take on a mortgage.

Mortgages in Retirement

While the dream is to enter retirement without a mortgage, often that’s not the case. The Federal Reserve estimates 35% of people from 65-74 have a mortgage. A Harvard Study estimates mortgages are held by 46% of those 65-79. And those figures don’t count early retirees who left the workforce before 65. So, maybe that dream house will be a little more costly than you think.  Or perhaps your financial planner looks at your situation and thinks that you should invest some of that money instead of having it tied up in your house.  Bottom line, in retirement you still may have a mortgage.

Now it’s time to explain my mistake.

My Escrow Error

When we bought our retirement home we were among those who took out a mortgage.  Our mortgage broker asked – “would you like escrow?”  Without thinking I said “of course.” That’s how quickly I made the mistake. Seriously, that question and answer took about three seconds. It took me a year to realize that was the WRONG answer – for us.

No longer are we receiving checks from our employers, where it was easiest (safest?) to add extra money each month into escrow, instead of budgeting ourselves for those huge tax and insurance bills. Today, our ‘paycheck’ comes directly from our own investment accounts.  So why do we need to give a bank hundreds of dollars extra each month so they can hold our money to pay the tax assessor once or twice a year? 

We don’t. 

We should have kept that money ourselves, either in our retirement accounts or a separate savings account where we could get interest or investment returns. ANYTHING is better than handing over our money to someone else months before it’s required.

For us, taking escrow was a Mortgage Mistake and a Lesson Learned.

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Other Reading: Learn more about mortgages from the Federal Trade Commission.