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A mortgage forever?

THE BALTIMORE SUN

Dr. Mary Furth has always "had issues with debt." She has seen the stress that it causes among her patients. Fears of bankruptcy. Fears of losing one's home.

The Towson psychiatrist sees patients with big mortgages who then may add a second mortgage or home equity line of credit. Such added burdens are not for her, however. In a few months, she'll be paying off her mortgage.

"In a sense, I'm part of a dying breed. I don't see anyone wanting to pay them off," she said. "I'd rather pay [the mortgage] off. I have an issue with owing money."

Furth, who grew up in the post-Depression era when saving money was the rule, says she derives a huge psychological benefit in being debt-free. Years ago, she paid off another home in Rodgers Forge, which she now rents out.

Does anyone pay off the mortgage anymore? For more and more homeowners, refinancing a current mortgage or being able to move up to a better house often means renewing a 30-year financial commitment. Instead of paying off the mortgage, perhaps by age 60, homeowners are extending it into their 70s or 80s.

"The old burning-of-the-mortgage is a thing of the past," said Al Ingraham, vice president of First Horizon Home Loans MNC Division.

Frank McDermott, a portfolio manager for a local broker and a retired Army officer, has made both choices. He paid off the mortgage on his last home -- but went straight into a new mortgage on a 5,000-square-foot home in Harford County. The idea of years of new debt didn't bother him. It was more important to provide space for his extended family.

"My goal wasn't to pay off a mortgage; it was to house my family," he said. "I made the decision to pay off my [last] mortgage and parlayed up. I also need the tax advantages."

While Furth's kind may not be heading toward extinction, McDermott's attitude seems to have taken the lead.

Today's homeowners don't worry about debt, or worry about it and do it anyway.

Measuring the change

The Mortgage Bankers Association of America reported that in 1999, 24.9 percent of U.S. households owned their homes "outright" or debt-free. That's a dip from 25.4 percent in 1993. Both counts were taken during years when mortgage rates dropped and a refinance boom occurred.

But MBA officials predict that with so much homeowner refinancing taking place, the percentage of those homeowners retiring a mortgage will decline more.

Psychologically, it may be a good idea to not have a mortgage, but does it make sense from a financial-planning standpoint?

The interest on a loan associated with a home is tax-deductible, and many homeowners need that write-off to offset taxes they're paying on other income.

Also, with mortgage rates near 7 percent for a 30-year term, many planners suggest using money to make money in equity markets, rather than paying off the mortgage.

"Most people put as little down as possible -- for the highest tax advantage, and invest the rest in stocks and mutual funds," said Ed Naworol, a finance specialist with SunTrust.

'A lost generation'

Tax specialist John Kenneally, who operates his own accounting firm, says that over the years he's been in business, the number of clients paying off mortgages by retirement has plunged from 50 percent to "maybe 10 percent."

"It is a lost generation," he said. "People who are retired often still have an equity line, or tap into their home in another way. Or now they want a second home and more debt. It's far-between [the client] with no mortgage interest deductions."

"We'll shift to people waiting until their 70s and 80s to pay off the mortgages," said agent Dick Peebles of Re/Max American Dream in Lutherville.

Many argue that if you're paying 7 percent interest on a home loan and an investment planner can get 10 percent to 15 percent in the stock market, you should use your savings to invest instead of paying off the low-interest, tax-deductible loan.

"Take a $200,000 house with 5 percent down or 50 percent down ... that house will appreciate regardless. The difference is what do you do with the rest of the money. Invest it elsewhere," Naworol said. "Don't let the money rot in a bag in the basement."

Naworol, who had been in his home for 12 years, refinanced his property in 1993, pulling cash equity out of it and spending it on curtains, appliances and a car.

"And I gave my stockbroker $50,000, and that's worth over $350,000 now," Naworol said. This isn't to say that every homeowner should refinance and pull money out of their home to invest in Wall Street, but it could be used to cover other debt that isn't tax-deductible -- such as credit card debt or a car loan.

"Pay off something to save money on interest you can't write off," Naworol said. "Pay off everything, but leave the mortgage."

Many homeowners who purchased their homes years ago have held onto their mortgages just to pay them off with cheaper dollars.

"When I bought it, things were cheaper than they are now," said George Gould of Laurel, who recently paid off his mortgage. "My mortgage payment got smaller in relative dollars as time went by. The interest got so small that in the end, it didn't mean that much."

The new attitude isn't totally about investment philosophy or tax savings. Factors such as job changes, the mobile society and move-up housing goals play a role.

'Credit is an expectation'

"Philosophies have changed. Credit is an expectation -- like instant gratification," Ingraham said. "There is an idea of entitlement. I maintain that owning a home is a privilege, not a right."

Ingraham, who worries about the future of Social Security, expects to work as long as he can. Many say the days of the comfortable pensions are over, so why not keep working and forget about burning the mortgage.

"If your Social Security and pension aren't enough to live on, consider paying it off. But that's the only time and even then, it depends on the pension. Some may want to keep small mortgages," Naworol said, adding that burning his mortgage wouldn't necessarily make him feel at peace.

"I could pay off my mortgage any day, but it wouldn't be wise. There'd be no tax write-off, and I'd probably even have to pay," he said.

George Gould had 2 1/2 years to go on his mortgage when he "just did it." There wasn't much interest left to be of much use on his taxes, and it felt good to clean the slate, though Gould thinks claims of psychological benefits have been exaggerated.

"It gets rid of that monthly payment and frees up about $200 a month," Gould said.

Gould is just glad he could stay put so long. His goal wasn't so much to pay off his mortgage as to have a stable life. Having grown up during the Depression and World War II, Gould remembers how difficult it was financially -- and how his parents couldn't buy a house until 1955.

"I promised myself that I'd buy a home and stick with it to give my kids the benefit of growing up in a place to call home," he said. "Today, too many people think of money, trading up and jobs. The kids aren't getting the stability of being in one area."

'Simplified' living

Maggie and James Craig owned a 10-bedroom mansion in Roland Park; then an opulent, 4,200- square-foot home in Cockeysville, when they decided "there was no end to it."

"I went to Bible studies in simple homes with happy people. I was almost embarrassed with what I had," she said.

They "simplified" seven years ago, selling their Cockeysville house for $645,000 -- and buying one for $290,000 in Parkton. No more mortgage. They paid $80,000 in capital gains tax, but they say it was worth it.

"The house was almost half the price and we have no mortgage. Living debt-free is what we all should strive for," she said.

Craig, who says move-up fever never ends because "there's always a better kitchen," is relieved to be out of that loop, but she doesn't consider herself part of a dying breed.

"We're a new breed. Get off that craziness that's meaningless," she said. "Here, a lot of women work part-time or not at all. There's no pressure of 'Oh, what do you do?' In the other neighborhood, if I wore casual clothes, I almost had to justify it."

Maryland Office on Aging statistics say that 70 percent of Maryland's seniors own their homes. Of those, 80 percent have paid off their loans and want to live out their years at home. Those statistics have been stable over the years and parallel the nation's, said the department's Ilene Rosenthal.

"If retirement income isn't earned, people still need to adjust to a lower income at retirement, and having debt may not be good because they're not in the same tax bracket," Rosenthal said. Mortgages, home equity loans or other investments could wind up being burdens.

'Rainy day mentality'

Though "boomer" attitudes have grown more pro-risk, Rosenthal said, values often change with age. Today's aggressive investors could wind up tomorrow's I-Want-To-Live-At-Home-Debt-Free seniors.

"It's the rainy day mentality. Their home is a pot of money to live in," Rosenthal said.

Even with all of the investment options, CPA Kenneally recommends to clients of all income levels that they buy a home when they're young and let their mortgage-burning parties coincide with their retirement parties -- unless they're "really aggressive in the stock market."

"It's more comforting to know that you don't write a big check every month," he said. "I'd rather see clients go to bed every night secure, rather than relying on stocks and hopes of what might happen."

"Most people borrow 2 1/2 times their yearly income for a mortgage. That's a hefty payment. The old days of big pensions are over. And I know 30-year-olds who've never been in 401(k)s, even when their companies match."

The old idea to "have six months' salary on hand" for liquidity still holds true, Kenneally said. If full ownership means no cash, it can mean a vulnerable position at times of real estate swings. Older homeowners, especially, don't want to be all house and no working capital, said other financial advisers.

Maggie Craig, who was a full-time real estate agent and now works for select clients, said newer agents often qualify buyers for the maximum loan amount they can possibly pay, with the idea that the payment loosens up later as income levels rise.

"Now [when she works with someone], I go with one income and tell them to spend everything on the house," she said. "They're not choking so much."

Fewer affordable options

Another reason many pay off their mortgages is that they often don't have other options. There's always the story about how a senior paid $10,000 for a house that's now worth $500,000, but plenty of seniors who bought modest homes 30 or 40 years ago can't find comparable homes, even after moderate appreciation, Rosenthal said.

"It can be hard to sell and buy a new one, with association fees and other costs," Rosenthal said. "If you bought the house for $10,000 and now it's worth $80,000 -- you still can't do it. You'll just have more debt. There aren't that many affordable options for these homeowners."

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