Newsletter Articles

How to Buy a Home for Your Retirement Years


Elder Law Associates Newsletter dated March 27, 2019

Mar 2.pngWhile retirement planning can be extremely complex and demanding, deciding where to live in retirement is one of the biggest decisions you must make, since it carries both financial and lifestyle implications.

Financially, the home is often a retiree’s largest asset and, at the same time, housing costs tend to be a retiree’s largest expense. On the flip side, where you live will also significantly impact your retirement lifestyle and ability to age in place. So, regardless of whether you plan to relocate and buy a new retirement home or stay where you are, there are a lot of factors to consider.

Many retirees have not thought about where they want to live in retirement before they retire, which is unfortunate because it can have a significant impact on your retirement costs.

Note: For instance, if you decide to buy a new home in a new state, you need to consider the costs of relocating, the new state’s tax system, change in the cost of living, and how this will impact your community and retirement lifestyle.

How Will You Pay for It?

When thinking about purchasing that retirement dream home, consider how you will finance the purchase. For most people, this starts with selling your current home and using equity freed up from the sale to help close on the new home.

But you will also need to consider whether you will take out a mortgage and find out if you will even qualify for a mortgage. Mortgage rates and qualification are largely based on employment status and income, so it often comes as a surprise to retirees who no longer work and have lower income when they get a high rate or struggle to even qualify for certain mortgages.

Retirees often turn to one of two plans:

  1. Set up a new 15- or 30-year mortgage
  2. Pay off the new house entirely in cash

While both strategies work, both have their downsides. By taking on a new mortgage payment, you’ll need to make sure you have the cash flow to support the new payments. On the other side, completely paying off the new house can tie up a large portion of your wealth in an illiquid asset.

A Third Option

Another option for retirees over age 62 is to look at purchasing your retirement dream home with a reverse mortgage, often called a HECM (pronounced “heck-um”) for purchase. The HECM for purchase was created by Congress to streamline the costs and process of setting up a reverse mortgage as part of a new home purchase.

Generally speaking, a HECM for purchase allows the buyer to put down 50 percent of the home price as a down payment and finance the other half through a reverse mortgage. This gives you the house you want but with no mandatory ongoing monthly mortgage payments.

You could choose to make monthly payments, but you’re not required to repay the mortgage obligation until the house is no longer being used as your principal residence. This essentially frees up some home equity for other uses and still helps ease some of the cash flow issues associated with 15- or 30-year mortgages.

Reverse mortgages were once viewed as a negative due to mishandling by lenders, but government regulation over the past few decades has helped make a HECM for purchase a safe option that retirees should consider alongside other mortgage options when purchasing a house after age 62.

Lifestyle Impact

Outside of the financial decision when purchasing a home in retirement, the lifestyle decision also needs to be considered. Ask yourself if this is your forever house. Most retirees want to age in place in their current home, so if you move in retirement, you likely won’t want to move again. You also likely won’t be able to completely undo the decision and move back to your original house, so relocating is a relatively “permanent” decision.

Important: When looking at a new retirement house you should see if the house’s layout and location support you to age in place. Where are the bathrooms? Does the house have lots of stairs? How far is the home from your community, family, and friends? Can you easily get to medical and other services you might need? Is this a house where you want to spend the rest of your life?

In addition to buying a new house or staying put, you may also consider selling your house and renting or moving into a continued care retirement community. While most homeowners do not want to sell their home and rent in retirement, it is an option for some.

Additionally, continued care retirement communities can be a viable retirement housing option for those with the finances and desire to live in such a setting. Typically, these types of communities have high up-front costs (often $250,000 or more) as well as ongoing fees.

But these communities provide housing, a sense of community, and sometimes substantial long-term care solutions and other benefits. One of the most important factors with any continued care retirement community is to ask about their financial strength to ensure they can fulfill their promises.

The Bottom Line

Moving in retirement is a huge decision and should be one of the most front-and-center decisions in any retirement plan. Retirement is not a static time period but changes over time, so consider the range of needs you might have in retirement.

Moving can be costly and emotionally draining, so make sure when it is time to move that you have looked carefully at your financing options, location, and consider how it will impact your long-term retirement goals. In the end, your home is where you will spend a great deal of your time, so make sure it gives you the best opportunity to live a secure and happy retirement.

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