If you’re nearing retirement, you may be considering a move. Retirees invest in new homes for various reasons, including downsizing to a smaller house, seeking a single-level home, or finding the ideal home in their dream retirement destination. As a current homeowner, you have options that leave you with an important question.
Should you buy your new home with cash or take out a mortgage?
At first glance, the answer may seem like an easy one. Yet, there are important factors retirees should consider. Using the funds from your current home to purchase your retirement home will relieve you of mortgage payments. However, it could leave you with no cash to pay for the lifestyle you’ve been dreaming of.
So, how do you know which is the right choice? We’re here to explore the benefits of each approach and how your personal situation will play into your choice.
Advantages of Paying Cash for a Home in Retirement
Paying cash for a home can save you time and money. It can also remove barriers that can delay or prevent the purchase. The biggest benefits of paying cash for your retirement home include:
Reduced Costs
Paying cash allows you to eliminate mortgage interest and closing costs. Closing costs average between 2% and 5% of the home price. This puts the national average at $4,661. Interest over the life of a mortgage loan is notably more substantial. A $400,000, 30-year mortgage loan with a 6% interest rate costs borrowers $463,353 over the life of the loan.
No Credit Requirements
Your credit score plays a crucial role in your eligibility for a mortgage with the best available terms. With average mortgage rates at 6.17%, getting the lowest rates possible is essential. When you pay cash, you don’t have to worry about your score.
Impress Sellers
Offering cash can put you ahead in a bidding war or help you negotiate a discount. Without lenders involved in the process, you won’t be forced to back out if the loan falls through.
Speed Up the Process
Cash offers eliminate the wait for lender approval, appraisals, and mortgage delays. This can streamline the closing process, getting you into your home up to 30 days sooner.
Own Your Home Free and Clear
If your financial situation changes due to health, inflation, or other reasons, you run the risk of not having the funds to pay your mortgage. Paying cash eliminates this worry and reduces your living expenses by allowing you to skip a hefty monthly mortgage payment.
Benefits of Getting a Mortgage
While paying cash has some obvious advantages, it isn’t the right choice for every buyer with cash on hand. Your financial outlook before selling your home will significantly impact how much of your home sale you feel comfortable tying up.
Invest Your Savings
If you’re an investor, you could potentially earn more money by investing the money from your home sale than you would lose through interest payments. For example, if you’re earning 10% interest on an investment, you’ll gain more in 20 years than the interest you paid for your mortgage loan.
You’ll Have Money for Renovations
If you’ve fallen in love with a home that needs work, getting a mortgage will allow you to save your cash for renovations. For example, paying for a new roof may not be feasible if you used all the cash from your home sale to pay for your new home.
Wait to Sell
If you get a mortgage, you can live in your current home while house hunting and waiting for the loan to go through. If you plan to use the proceeds from your home sale, you may have to use some of the money for a short-term rental while you’re finding a home.
Handling Taxes
Taxes in the form of deductions and payments apply when selling one home and buying another. Mortgage interest payments can provide a significant tax deduction for borrowers who itemize deductions when paying annual taxes. Your ability to comfortably pay capital gains taxes on the sale of your home is another factor to consider. If you’ll gain more than $250,000 ($500,000 for married couples) over the price you paid for your home, you’ll have to pay taxes on the amount you gained. If you’re paying cash for your new home, you may not have enough set aside to cover your taxes and maintain your lifestyle.
Factors To Consider When Choosing Between Paying Cash or a Mortgage in Retirement
Choosing whether to pay cash for your retirement home isn’t as easy as it sounds. Your choice will depend heavily on your planned retirement budget and how much you’ve saved. While your home equity is an asset, it’s not liquid cash that can be used immediately in an emergency.
If you have ample savings and will never rely on your home’s equity, paying cash is likely a sensible option. However, if paying cash will leave you struggling to get by, a mortgage can be a better option. When you have cash on hand, you have the flexibility to consider a shorter loan term, which will allow you to get out from under debt quickly and have spending money on hand.
Finding a Retirement Home That Fits Your Dreams and Budget
Buying in cash isn’t a no-brainer. However, it can be the safest course of action for prepared buyers in an unpredictable housing market. If you’re downsizing in retirement, you may be able to pay in cash and have money left over. For example, selling your house and moving to a condo in a 55+ community can save you money you can put toward enjoying your golden years at the beach, in the mountains, or wherever your retirement dream leads.
If you’re unsure about your financial outlook for retirement, consulting with a financial advisor can help you plot the course of action that best aligns with your specific circumstances. When you’re ready to find your dream retirement home, 55places is standing by to help. Explore 55+ communities in your target state or connect with one of our agents to get started.
FAQ: Paying Cash vs. Taking Out a Mortgage in Retirement
1. Is it better to buy a home with cash or take out a mortgage in retirement?
The answer depends on your savings, income needs, and long-term financial goals. Both choices offer clear advantages depending on your situation.
2. What are the biggest benefits of paying cash for a home in retirement?
Paying cash can eliminate mortgage payments, reduce closing costs, speed up the buying process, and provide peace of mind.
3. Does paying cash really help retirees win bidding wars?
Yes. Cash offers are often more attractive to sellers because they remove the risk of financing falling through.
4. Are there downsides to buying a retirement home with cash?
The main drawback is tying up a large amount of money that you may need later for emergencies, travel, or medical expenses.
5. Why do some retirees choose to take out a mortgage instead of paying cash?
A mortgage allows retirees to keep more cash on hand, maintain liquidity, and potentially earn more through investments.
6. Can taking out a mortgage help retirees preserve their retirement savings?
Yes. Keeping cash invested or held in reserves can offer financial flexibility and long-term stability.
7. Do retirees need good credit to qualify for a mortgage?
Yes. Lenders still evaluate credit scores, debt-to-income ratios, and assets even for retirees.
8. What financial factors should retirees consider before paying cash?
Consider your emergency fund, health-care needs, income sources, portfolio performance, and how much liquid money you’ll have left.
9. Can paying cash improve financial security in retirement?
For some retirees, being mortgage-free dramatically lowers monthly expenses and creates long-term stability.
10. Who can help retirees decide between paying cash and getting a mortgage?
A financial advisor can help evaluate tax implications, long-term budgeting, and investment performance to determine the best option.
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