Here’s an idea: Buying a retirement home should not be for the retired.
At first this may seem like an odd notion. After all, it’s entirely natural to associate retirement with retirement real estate. However, if someone is truly retired, as in not working, it may be difficult to obtain the home you want to buy. It may well be a better idea to buy before leaving the workforce.
The central reason to buy a retirement home now concerns money. In the period before retirement, we are each, by definition, not retired, which is to say we are working. Not only are we working, but after a long time in a given industry, field or profession it’s likely that we have maxed out our income.
“A few years before retirement lenders likely see a prospective borrower who can easily document income and assets, someone with a solid credit rating,” said Rick Sharga, executive vice president at Auction.com. “Alternatively, if someone without employment walks into a lender’s office it may be more difficult to prove that the potential borrower has the ability to repay the loan.”
The biggest retirement issue for many people is the question of where to live. Yes, it’s been great to live where you are today and it might be terrific to age in place, but would a warmer climate be of interest or maybe a place at the beach or a mountain town? What about a location closer to adult children? Perhaps a change of venue would be good for the soul, to say nothing about the wallet.
The catch is that now may not be the right time to move. Maybe you can’t move because of a good job situation. Sure, moving to another location with a lower cost-of-living could make retirement dollars go further but how can you finance such a move if you leave your current location?
Several options stand out:
- Sell you current residence and rent in the community where you now live. Use the proceeds from the sale to buy a retirement home.
- Keep your current residence and refinance at today’s rates to get cash out of the property. This will allow you stay where you are while funding the purchase of a home elsewhere.
- If you have no mortgage, finance the current home and use the proceeds to buy a second property outright. When the time is right sell the first house to pay off the mortgage. Since lenders will only provide a loan which reflects a portion of your property’s value the idea is that when you sell the home it will be worth enough to repay the debt in its entirety. In the end you will have sold the original house and the second one will be mortgage-free.
- Buy a retirement home and rent it out until you want to move. If you go this route be certain to tell the lender that you intend to use the property as investment real estate and that it’s not a second home.
- If past age 62, refinance today’s property with a reverse mortgage. With this form of financing there’s no monthly requirement to pay principal and interest, instead interest is added to the loan amount. If you sell, move or pass away the loan becomes payable, however the lender cannot collect more than the value of the property that secures the loan. Speak with an attorney who specializes in elder law for details.
- Buy a second home and allow adult children to rent the current house. This produces income to support the second property, however it may raise significant tax issues.
- No matter what choices you consider, sit down with a tax professional before making a decision to see how given options impact your tax situation.
About the Author:
Peter G. Miller is a nationally syndicated real estate columnist. His books, published originally by Harper & Row, sold more than 300,000 copies. He blogs at OurBroker.com and contributes to such leading sites as RealtyTrac.com, the Huffington Post and Auction.com. Miller has also spoken before such groups as the National Association of Realtors and the Association of Real Estate License Law Officials.