Buying a Home for Retirement

Ten thousand Americans are going to retire today, and many will be thinking of buying a home that's going to work for them in the next stage of their lives. Another 10,000 will be retiring tomorrow, and the day after, and, according to the Pew Research Center, every day after that until at least 2030. Many are likely to see moving as a big part of their plans. Some may want to escape from the urban lifestyle to which they were tethered by their work. Others may want to relocate to be closer to family or friends. And a lot are going to want to downsize to something easier and more affordable to maintain -- and to release some of the equity in their existing family home so that they can better afford a comfortable retirement lifestyle.

Choosing Your Home

Selling and buying a home is an expensive business, and you probably want to find a place that will suit you for decades. Just remember how much your life might change over that period. This means the criteria you previously used to select homes may have to be adjusted. Bear in mind these factors:

  1. Your health may be great now, but how far from a tophospital and a good doctor might you want to be in 10 or 15 years time?
  2. It doesn't matter how beautiful the spot is where you hope to retire;you risk becoming isolated if you move to an area where you've no roots, friends or relations. This may not apply if you're unusually gregarious or have routes into the community, such as church or Rotary.
  3. Being able to easily navigate your new home using a wheelchair or walking aid may one day become a necessity, at least if you wish to remain independent. Watch out for narrow doors and tight corners.
  4. Your ability to clean and maintain a larger home (and maybe yard) to your current standards may diminish over the years. Similarly, meeting the costs of doing so (and of heating and cooling a large space) may become more challenging if your savings dwindle.

Having said all that, many retirees find extreme downsizing traumatic, and you may well legitimately choose to ignore those factors and live with the consequences. Before you decide, check out U.S. News and World Report's list of 10 cities where the median price of homes is under $150,000.

What you really shouldn't ignore are the financial implications of your move. You need to go through the figures in depth. Once you've added up all your costs, you may well find you're left with less extra money than you thought. In fact, a couple of years ago, The Wall Street Journal reported that some retirees were actually worse off after downsizing, although rising home prices might well have reduced their number since then.

Financing Your Home

It used to be rare for people to retire with a mortgage. Many saw the monthly payments as a millstone around their necks, and would do anything to avoid them. Things have certainly changed, and the question you need to ask yourself is should I be buying a home with a mortgage when I retire?

In January, Forbes published a list of circumstances in which it often does make good financial sense. These included:

  1. You have significant high-interest debt likecredit card balances to pay off.
  2. The mortgage tax break improves your standard of living.
  3. Your money's already working harder elsewhere, and cashing in an investment to reduce your home loan could cost you.
  4. You could end up short of cash, although a reverse mortgage may help if this becomes an issue.
  5. You're still working, andacceleratingyourmortgage payoffwould keep you fromtaking full advantage of your employer's matching contribution to your 401(k) account.

Getting a Mortgage When You're Retired

Retirees can have difficulty finding lenders willing to approve their applications. Even those with substantial assets may fail to meet income thresholds. Some may still not find it easy, but many will be helped by 2013 rule changes introduced by Freddie Mac and Fannie Mae. These allowed lenders to take into account the assets of retired people wanting FHA-backed conforming, conventional mortgages and refinances, according to the AARP.

How does this work? The retiree's assets are first reduced by 30 percent, to account for potential drops in value, and then they are divided by the number of payments in the loan's term. So an applicant with a $500,000 stock portfolio would be credited with an extra $972 a month income ($500,000 * 70 percent = $350,000. $350,000 / 360 months = $972). For a 15-year loan, the applicant would get $1,944 a month. It might be easier to qualify for a 15-year loan than a 30-year loan in that case.

Asset Depletion

Some lenders offer a similar alternative called "asset depletion." This means assuming that the borrower will withdraw a certain amount of money each month from investment accounts, and treating this withdrawal as income. Here's a typical calculation, using the same $500,000 nest egg:

  1. Subtract 12 months of housing expenses plus all other accounts. Assuming this applicant wants a loan with a $1,000 payment for principal, interest, taxes and insurance, and $500 a month in other payments, that's $18,000 off the top. The remaining balance is $482,000.
  2. Subtract the borrower's age from 85 (but use a minimum of ten years and a maximum of 30). If the applicant is 65, you'll amortize the $482,000 over 20 years.
  3. You''ll build a five percent rate of return (what the borrower could expect to earn on this money) into the monthly payment. The result is $3,300 a month in added income. This is a more generous calculation than Fannie Mae's, so if you need to qualify for a bigger mortgage, this is the loan to seek out.

Whether or not you choose to downsize, or to retire with or without a mortgage, it's worth taking time to ponder the decisions you're making now. Retirement can't really be called the "golden years" without some (metaphorical) gold.

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