Paying off Mortgages before Retirement

By Erwin Bosman - Imported from 500px (archived version) by the Archive Team. (detail page), CC0, https://commons.wikimedia.org/w/index.php?curid=71327793

I was quoted in Should You Pay off Your Mortgage before Retirement? It opens,

Getting rid of what may be your largest monthly expense and unburdening yourself of debt are great benefits of becoming mortgage free at any age. But it may be particularly attractive as you approach retirement.

“Back in the 20th century, people used to burn their mortgage documents once they had paid the loan off,” said David Reiss, a law professor who specializes in real estate and consumer financial services at Brooklyn Law School in New York. “That practice reflected the freedom that many felt from no longer having to borrow to own their family home.”

Indeed, that emotional freedom helped make the idea of paying off your mortgage before retirement conventional wisdom for financial planning.

And there are still good reasons to consider it.

“It’s always helpful to pay attention to rules of thumb like, ‘You should pay off your mortgage before retirement,’” said Reiss. Those rules are often true under typical circumstances. But you want to understand the assumptions behind the rules and see how they compare with your situation.

Traditionally, the main reasons to pay off your mortgage before retirement are to get rid of the monthly payment (perhaps allowing for a better balance of income with expenses) and to gain the emotional benefit of having your home paid off, said Casey Fleming, a California-based mortgage advisor and the author of Buying and Financing Your New Home.

But there can be other considerations as well. These can include:

Each of these areas can provide good reasons to sunset a mortgage, but also good reasons not to. It all depends on personal circumstances, so it’s important to take a closer look.

Balancing income and expenses

For some people, retirement means shifting to a fixed income that may be lower than what they brought in during their working years. Eliminating a significant bill ahead of time — like a mortgage payment — may make living on a fixed income a little more affordable.

But that may not be the case for everyone.

“For instance, most people see a significant drop in income when they retire,” Reiss said. “If that is not the case for you — you have a great pension, your spouse is still working, etc. — then you have more flexibility when it comes to your mortgage.”

When matching income and expenses in retirement, it’s important also to take a long-term view. For example, if your spouse will retire a few years after you do, you may want to increase your mortgage payments to time their retirement with your loan payoff date.

Emotional benefits

When you carry a mortgage, someone else has a powerful legal hold on your home. Forget to pay your homeowner’s insurance bill? Your lender can buy coverage — very expensive coverage — on your behalf. Miss too many loan payments? Your lender can foreclose.

As noted earlier, taking back that power made paying off the mortgage a celebratory event. Not only did people burn mortgage documents, but some also hung eagles over their doorways, using the symbol of American freedom to herald their freedom from mortgage debt to visitors.

Yet you’re never truly free of foreclosure risk — you’ll still have to pay your property taxes even after you’ve extinguished your mortgage. And most people should still carry homeowner’s insurance, even when a lender doesn’t require it — which means you’ll have to answer to your insurance carrier. If they don’t like the wood-burning stove in your garage, you’ll have to take it out unless you can find another company that approves having it.

Still, many people feel differently about their homes once the mortgage is paid in full.

Liquidity

Paying off your mortgage before you retire — assuming that you’re not already on schedule to do so — means using assets you might otherwise allocate elsewhere.

Generally, if you have enough money in your retirement fund to handle your living expenses comfortably, plus a cushion for extraordinary expenses (like medical bills as you get older), then it’s safe to pay off your mortgage, Fleming said.

But it may be unwise to use liquid assets, such as stocks, bonds, and cash, to pay down your mortgage as you approach retirement because home equity is far less liquid. If, after you retire, you wish you had that money back, you may have to look at options for selling your home, refinancing it, or getting a reverse mortgage, all of which require time and fees.

Return on investment

Paying off any sort of debt gives you a guaranteed return on investment. If you’re carrying a mortgage at 7 percent, paying it off may be attractive because you typically would have difficulty earning a guaranteed 7 percent long term anywhere else.

Of course, with a lower mortgage rate or a higher risk tolerance, early mortgage repayment becomes less attractive from an ROI perspective. So, it becomes a personal choice about risk and lifestyle.

Taxes

Another argument in favor of paying off your mortgage before retirement is if you won’t lose a tax deduction by doing so.

“The standard deduction is pretty high now, and many seniors don’t benefit anymore from the mortgage interest tax deduction,” Fleming said.

If your standard deduction is greater than your itemized deductions — and for the vast majority of Americans, it is — you can’t reduce your tax obligations by deducting your mortgage interest.

However, the standard deduction in effect today could halve in 2026. The doubling of the standard deduction that became effective in 2018 is one of many tax code provisions that’s set to expire at the end of 2025.

And even if your mortgage interest by itself doesn’t get you over the standard deduction threshold — in 2023, that’s $13,850 for single taxpayers, $27,700 for married taxpayers who file jointly, and $20,800 for heads of household — when combined with other itemizable deductions such as charitable donations and state and local income taxes, paying off your mortgage early might increase your tax bill.

“If you pay off a mortgage early, you are saving on mortgage interest, but you may also be giving up the mortgage interest deduction,” Reiss said. “If you do not pay it off early, you can earn interest in a bank account, but you will be paying taxes on that interest. You want to think through the consequences of your choice to see which is the most financially attractive, including the tax consequences.”

CBC Interview on Appointment of Special Counsel

(Source: rawpixel.com)

I was interviewed by the Canadian Broadcasting Company in Special Counsel to Investigate Biden’s Handling of Classified Documents. The clip explains that a “special counsel has been named to investigate U.S. President Joe Biden’s handling of two batches of classified documents after more sensitive government materials were found in his personal home.”

Helping Your Kids Qualify for a Mortgage?

Mitchell Joyce https://creativecommons.org/licenses/by-nc/2.0/

Mitchell Joyce https://creativecommons.org/licenses/by-nc/2.0/

The Wall Street Journal quoted me in Helping Your Kids Qualify for a Mortgage? What to Know Before Cosigning on the Dotted Line. It reads, in part,

With rising interest rates and slowing real-estate sales, homeownership remains out of reach for many would-be buyers. According to the National Association of Home Builders, in the second quarter of 2022, housing affordability fell to its lowest point since the 2007-09 recession.

The NAHB/Wells Fargo Housing Opportunity Index found that just 42.8% of new and existing homes sold between the beginning of April and the end of June were affordable to families earning the U.S. median income of $90,000. This is a sharp drop from the 56.9% of homes sold in the first quarter that were affordable to median-income earners.One option to improve affordability, especially for those who lack good credit: Have mom and dad cosign the mortgage. Many parents are willing to do so, according to data prepared for The Wall Street Journal by LendingTree Inc., an online loan marketplace, which reported that 57% of parents would be willing to cosign their child’s mortgage and 7% have done so in the past.

 *.     *.     *

There is a difference between cosigning and guaranteeing. According to David Reiss, a professor at Brooklyn Law School who specializes in real estate, a parent acting as a co-borrower has the same responsibilities under the loan as their child. They are liable for the payments as they come due and can be sued by the lender for nonpayment if the loan becomes delinquent. But a parent acting as a guarantor has a different legal relationship with both the lender and the child. A parent guarantor would be responsible for the loan only if the child first defaults.

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NYSBA Task Force on the Digital Economy (and the Real Economy)

The New York Law Journal ran a story on the NYSBA’s new Task Force on Emerging Digital Finance and Currency. The NYSBA Press Release is here. Joseph Bizub, my co-author, and I are members of the Task Force. We are writing about the impact of fintech on real estate investment. The Press Release reads:

The New York State Bar Association has launched a task force to make recommendations on how New York should regulate virtual currencies and digital assets and advise the association what the new technology can do for its operations.

“The rapid growth of the metaverse/Web3 and the digital economy present a confluence of issues for lawyers,” said President Sherry Levin Wallach. “At the same time, this technology has the power to significantly change the way we do business, bank, and interact both personally and professionally. It’s important that we are in front of the issues and able to engage productively in this quickly evolving space.”

The task force will work to educate NYSBA members and the legal community about the impact of the digital economy and the legal issues that are likely to arise in representation of clients. It will also evaluate legislative and regulatory proposals and explore how the metaverse and Web3 can benefit the legal profession and bar associations.

“We are already seeing the effects of this trillion-dollar industry in many areas of practice including entertainment, business, intellectual property, tax, criminal and environmental law and trusts and estates,” Levin Wallach said. “The Task Force on Emerging Digital Finance and Currency will ensure that the New York State Bar Association has a voice in this innovative and emerging field.”

Jacqueline J. Drohan, partner at Drohan Lee, and Dana V. Syracuse, co-chair of Perkins Coie’s Fintech Industry Group, will co-chair the task force. The vice chair will be Dr. Carlos Mauricio Sakata Mirandola, CMSquare, São Paulo, Brazil. Marc Beckman, founding partner of DMA United, New York, NY, and Nancy Chanin, who oversees business development at DMA United, will be consultants to the task force.

New York State Bar Association President-Elect Richard C. Lewis will be the task force’s liaison to the association’s Executive Committee. Joseph Bizub and Dina Khedr of Brooklyn Law School will be law student members of the task force.

The members of the task force include:

Alyssa Barreiro, head of fiduciary risk, BNY Mellon, Binghamton, NY

Joshua Lee Boehm, partner, Perkins Coie, Phoenix, AZ

Julie T. Houth, staff attorney, Robbins Geller Rudman & Dowd, San Diego, CA

Luca CM Melchionna, managing member, Melchionna, New York, NY

John W. R. Murray, partner, Foley Hoag, New York, NY

Jeffrey D. Neuburger, head of Blockchain group, Proskauer Rose; New York, NY

Rory J. Radding, partner, Mauriel Kapouytian Woods, New York, NY

David J. Reiss, professor of law and research director, Brooklyn Law School Center for Urban Business Entrepreneurship, New York, NY

Jason Schwartz, tax partner and co-head of Digital Assets and Blockchain Practice, Fried, Frank, Harris, Shriver & Jacobson, Washington, DC

Robyn T. Williams, associate, Devlin Law Firm, Cleveland, OH

Can NYS Rename Trump State Park?

 

photo by Jeffrey Putman

Politifact quoted me in Can New York State Rename Donald J. Trump State Park? It reads,

Even after officially decamping for Palm Beach, Fla., former President Donald Trump has continued to stir emotions in his previous home state of New York.

New York Assemblywoman Sandy Galef, a Democrat, said she believes a park currently named for Trump north of New York City should be renamed. Trump donated the land for the park, and it was agreed at the time it would be named after him.

In a Jan. 14 letter to Erik Kulleseid, the Parks, Recreation and Historic Preservation Commissioner in New York, Galef wrote, “It is my understanding that Mr. Trump did not sign the appropriate documents with the state, rendering any claim of breach of contract moot. We can and should rename the park.”

In an interview, Galef added that the park “really hasn’t been fixed up” and that efforts to do so would be hobbled by having Trump’s name on it. Galef said she believes the park should instead be named after former New York Gov. George Pataki, a Republican.

“Around this area, when you have ‘Trump’ on the name of something, it doesn’t go over very well,” Galef said. “My concern is that people aren’t going to want to put money into Trump Park, whether it’s state dollars or any private dollars.”

Galef has support in her quest to rename the park: On Feb. 11, a bill advanced in the Assembly to continue talks on renaming the park.

But the former president may pursue litigation against the state if the Parks Department decides to rename the park, a Trump spokesman said.

“Despite the fact that the state has done a horrible job running and maintaining the park in question, an utter disgrace to such incredible land and a generous donation, the conditions of this gift, formally documented and accepted by the state of New York, could not be clearer: the park must bear Trump’s name,” Trump’s office said in a statement. “This would be breaching its agreement by removing Trump’s name, and Trump will take whatever legal action that may be necessary to fully enforce his rights under this agreement.”

Is Galef right that New York state could change the name without too much difficulty? The answer isn’t clear enough for us to render a Truth-O-Meter verdict. But we decided to take a look at the issue and explain what we found.

How the park came to be

Donald J. Trump State Park sits on the border of Putnam and Westchester counties along the Taconic Parkway. Trump gave the land to New York State in 2006 after the former president failed in building a golf course on it.

The land deed for the property does not include any naming provisions, but the state named the park after Trump based on a letter of agreement between the Parks Department and Trump’s lawyers.

The letter outlined several terms, one of which is the following: “Each of the properties will bear a name which includes Mr. Trump’s name, in acknowledgment of these gifts. The name will be prominently displayed at least at each entrance to each property.”

The letter includes signatures by Trump’s lawyers and by Trump himself, and it was “acknowledged and accepted” by James Sponable, who was then the Parks Department’s director of real property.

The New York State Attorney General’s office referred questions about the park’s possible renaming to the Parks Department. The Parks Department did not respond to multiple requests for comment.

But legal experts say it isn’t clear how ironclad the terms in the letter are.

“The land is called a gift, so this seems to be memorializing the terms of a gift,” David Reiss, a real estate law specialist at Brooklyn Law School, told PolitiFact. “So, one question is, ‘What’s the enforceability of this letter?’ It’s not obvious to me that this would be analyzed as a contractual dispute.”

Reiss said because the letter does not clearly state that it is a binding contract, it is unclear how a court would treat it if the state were to rename the park and Trump legally challenged it.

“The letter says, ‘We have this understanding,’ but it doesn’t say what would happen if the understanding isn’t held to,” Reiss said. “It doesn’t say what would happen if, at some later time, it changed. There is no promise that the naming would be perpetual. So it’s unclear what Trump’s rights would be to enforce this based on the language of this document.”

Ultimately, Reiss said, “the one sure thing is there could be a lot of litigation about these issues, if the parties chose to litigate.”

A possible plan B

As an alternative, Galef said Trump’s name could be removed from a sign on the Taconic Parkway, which is the most common way for motorists to see it. The letter “doesn’t say you have to have a sign on the Taconic Parkway, … That could come down,” Galef said in the interview.

Reiss, the legal expert, agreed with Galef’s interpretation and said that it might be a feasible option.

“The sign on the Taconic is not the entrance of the park, so you could comply with the letter and still take that sign down,” he said. “It might be confusing to people if you say, ‘Unnamed State Park, next right,” but if you stuck to the black letter of this letter, you could say, ‘Right at the entrance of the park is where we’re going to put the sign, but nowhere before.’”

Non-debt Financing for Home Purchases

Professor Shelby Green

I will be presenting on Non-Debt Financing for Home Purchase: Risks and Promises as part of the ABA’s Section of Real Property, Trust and Estate Law “Professors’ Corner.”  It will take place at 12:30 PM (Eastern Time) on June 9th.  The program is free for ABA members and non-members alike, although registration is required.  Professor Shelby D. Green of Pace University’s Elisabeth Haub School of Law will moderate.  The program description reads:

A new class of financing options is emerging, including non-debt or equity investment, either facilitating the initial purchase with no borrowing or enabling access to equity from existing homeownership. The presenter will discuss whether the surface appeal of these financing inventions may camouflage risks that if not disclosed and well-managed could portend disruption in the housing markets.

Update:  The slides for the presentation can be found here.

Law in The Time of COVID: The Ripple Effect in Real Estate

Dean Michael Cahill

In many ways, COVID-19 has changed the way we live for both the immediate future and long-term. Brooklyn Law School Dean Michael Cahill has been sitting down with members of the Brooklyn Law School faculty to discuss the legal ramifications of our response to COVID-19 and what a post-pandemic world may look like.  Here is the link to our discussion of the effect of the pandemic on the real estate market and beyond: https://youtu.be/j9DFBOsU3qw.