Should Retirees Rent or Own? 3 Questions to Help You Decide

By: Terri Williams

For many of us, the decision to rent or buy is dictated by our income. If the monthly costs of homeownership take up no more than 30% of your income and you can afford a down payment, then buying a home is likely to make more financial sense.

But for retirees, who are typically on a fixed income, deciding between renting and buying isn’t such a simple calculation.

Retirees may choose to relocate for a variety of reasons, including downsizing, being closer to family, or to enjoy a warmer climate.

But no matter what your motivation for moving, you may be wondering if renting or buying a home is the smart choice. If you find yourself in a similar dilemma, ask yourself the following questions.

1. Is your income stable?

When you’re on a fixed income, it greatly helps to have fixed housing costs. That’s why taking out a mortgage might make sense for retirees.

“Having to worry about rising rent costs when you’re on a fixed budget can be stressful; owning your home means you have one flat payment every month that is also building equity for the future,” says Lori Beardslee, senior branch manager and construction specialist at Silverton Mortgage in Canton, GA.

However, in some markets, renting may be a good financial decision. According to Daniel R. Hill, CFP, AIF and president of D.R. Hill Wealth Strategies in Richmond, VA, the overall cost of renting is typically cheaper than buying—when you leave equity out of the equation.

“It’s also much cheaper to move from one rental property to another than it is to sell a house,” he says. That’s because you don’t have to worry about closing costs, homeowners insurance, a large down payment, and so on.

2. Can you afford routine upkeep?

One major concern for retirees to consider is the upkeep and maintenance that inevitably comes with owning a home. Cutting the grass, painting, and other home maintenance tasks are a hassle for anyone, but they can be downright dangerous for retirees.

Of course, these projects can be outsourced, but that costs money. And major home repairs—like a new roof, plumbing, or HVAC—can run to several thousands of dollars.

One advantage of renting is that the landlord will handle a majority of the home maintenance—some will even change the ceiling lightbulbs for you.

However, there’s another option to consider.

“Owning a condo or living in an HOA-maintained property can make homeownership much easier and maintenance-free for seniors,” says Beardslee. That’s why many seniors see condo living as a happy medium.

3. Will you qualify for a mortgage?

If you decide to downsize your home or move to another location, getting approved for a new mortgage may not be as easy as you think.

“If you have not financed a property after 2008, you may not know that the rules have changed since the Dodd-Frank regulations,” says Kevin Leibowitz, founder and mortgage broker at Grayton Mortgage in Brooklyn, NY.

Before 2008, he says you only needed a large down payment and a good credit history to obtain financing.

“Today, one of the most important factors is income, so the money you might be receiving from Social Security or your pension might not be sufficient to qualify you for the mortgage on the property you want to acquire,” Leibowitz explains.

However, Beardslee believes that it might actually be easier for older Americans to get a mortgage.

“A recent survey by the National Association of Realtors® shows that older Americans are the most worried about qualifying for a mortgage, yet have a better shot at being approved over younger generations.”

She says that credit scores and debt levels tend to improve with age, and baby boomers and the Silent Generation tend to have a more desirable debt-to-income ratio. They’re also more likely to have a larger down payment from the equity in a previous home.

“This plays a huge role in the mortgage process and gives older individuals a leg up on their loan applications,” she says.

If you do plan on buying and relocating during retirement, it might be in your best interest to rent in your new neighborhood first.

“You want to learn the area, and determine if it is truly where you want to be long term,” says Jonathan Bednar II, CFP at Paradigm Wealth Partners in Knoxville, TN. “Renting will allow you to pick up and move if your living situation is not the right fit.”

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5 Ways to Tap Your Home Equity to Live Well in Retirement

retirement

By: Beth Braverman

5 Ways to Tap Your Home Equity When You Retire

There are plenty of reasons why many people today aren’t financially prepared for retirement. We’re living longer, so we have to stretch our savings further. And the pensions that helped previous generations have largely vanished.

But that doesn’t mean it’s time to panic quite yet.

Truth told, many on the cusp of retirement do have one source of cash that could help them close the gap between what they have for retirement and what they’ll need to live well: their home.

5 Ways to Tap Your Home Equity When You Retire

In fact, the majority of senior Americans have more money in home equity than they do in their retirement portfolios, according to an analysis last year by the Center for Retirement Research at Boston College. So how much cash are you sitting on, anyway? To figure out your home equity, subtract the amount you owe on your mortgage from the current market value of your property. Next, to see whether you’ll need that money in retirement, plug your other info (excluding the value of your home equity) into a retirement calculator, then see whether you’ll be able to comfortably live without it.

“A lot of people think of their home equity as their Plan B for retirement, but for a lot of people it really has to be their Plan A,” says Jenna Rogers, a client adviser with Mission Wealth.

If it looks like you’re going to have to tap your equity, you’ll want to make a plan for the best way to do so. Here are five options, and the benefits and drawbacks of each.

Option 1: Sell and move

This is probably the first thing retirees think of doing with their home, and for good reason: Many retirees feel liberated after shedding their excess stuff to move to smaller digs.

Pros: By selling and moving to a less expensive house or region, you’ll not only bolster your portfolio with the proceeds, you’ll also lower your monthly expenses. And if you move to a condo or apartment, you won’t have to deal with external home maintenance issues anymore.

Cons: Moving can be stressful and far from ideal. Nearly two-thirds of baby boomers don’t plan to move in retirement, according to a 2014 survey by the Demand Institute.

Option 2: Open a HELOC

If you have enough cash to cover your day-to-day needs but no cushion for unexpected expenses such as medical bills, a home equity line of credit can serve as an emergency fund.

“For somebody who doesn’t have a cash safety net, a HELOC is a way to get peace of mind,” says Andrew Rafal, president and founder of BaynTree Wealth Advisors.

Pros: You get to stay in your home. You’ll have to pay only the interest on the amount you use during the “draw period,” typically 10 years. Interest rates are so low now that those payments will be pretty minimal.

Cons: When the draw period ends, you’ll need to pay back the principal as well—and rates will likely be higher than they are now. So if you use a HELOC, focus on paying off the debt before the adjustment hits.

You typically need to prove your income to get approved for a HELOC, so if you’ve already retired you may have trouble securing one. A lender can also freeze a HELOC if it’s concerned your home’s value has gone down or you’ll be unable to make the payments.

Option 3: Use a reverse mortgage

A reverse mortgage allows you to tap your home’s equity but is different from a HELOC in that you don’t have to pay it back until you move or pass away.

Pros: Unlike a HELOC, which is good for short-term borrowing, a reverse mortgage gives you cash for the long haul in the form of monthly checks, says Damon Gonzalez, founder of Domestique Capital.

Cons: The fees associated with a reverse mortgage are high, although they’re typically rolled into the loan so you won’t have to pay them upfront. Since a reverse mortgage can eat through the equity in your home, there may be little or none left to pass on to your heirs, or if you eventually decide to move.

Option 4: Become a landlord

It may not be a huge investment to turn part of your home into an apartment with its own kitchen, bathroom, and entrance. Or, you can rent out your entire home for all or part of the year, rent a smaller unit yourself, and pocket the difference.

Pros: You can cover or offset your housing costs with rental income—and postpone selling your home for longer than you might otherwise be able to.

Cons: You’ll have to deal with all the headaches that come with having tenants. Be ready for 3 a.m. phone calls, and have enough cash in reserve that the apartment or home can be vacant between renters.

Option 5: Do a sale/leaseback to your kids

If passing the family home to your children is important to you, you may be able to sell it to them now and then pay rent so that you can continue living there.

Pros: You get to stay in your home and ensure that it remains in the family.

Cons: Your children have to agree to the deal and have the cash to make it work. You’re also setting yourself up for potential conflicts with your children if you ultimately have trouble paying the rent or need them to take care of repairs or other issues.

 

 

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