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Answer: It’s important to talk to a real estate expert or financial advisor about which method of financing a home purchase is better for your specific circumstances. But generally speaking, paying cash can help reduce your monthly expenses, and taking out a mortgage can keep your savings free for other purposes.
When entering retirement, many people downsize. You may be looking for a home that’s easier to clean or has fewer bedrooms now that children are out of the picture. Or you might need a single-level home, so you don’t have to deal with stairs in the future. Luckily, homebuying for retirees can be an easy transition, financially speaking. How so?
Well, the larger home you just sold is worth more than the smaller one you’re probably moving into. This is not always the case, especially if relocating for other reasons. But it often is, especially if you’re selling your house and moving into a condo in a 55+ community.
So, should you buy your new home with cash or take out a mortgage? There are advantages to each approach. Let’s take a look at homebuying for retirees.
Advantages of Paying Cash
The biggest advantage of paying cash is not having to pay interest on a mortgage. This makes the overall cost of the home cheaper, sometimes a lot cheaper, than taking out a loan. There are some other key advantages too:
Reduced Closing Costs
This can save you tens of thousands of dollars. You can use the extra cash to buy a larger home or for other expenses. Also, you don’t have to get an appraisal, pay mortgage origination fees, etc., which all add on additional costs.
Sellers Like It
Sellers love cash offers. Offering cash can put you ahead in a bidding war over people who are offering a higher value with a mortgage. Why? Because you won’t be forced to back out when the lender decides to give you trouble. Sellers will often give a “cash discount,” especially as it reduces their closing costs too.
The Buying Process Is Faster
You can typically take possession two weeks faster than with a mortgage.
You Can Avoid the Appraisal Trap
The appraisal trap is when you get the home appraised for the lender, and the appraisal comes out lower than the price. The lender is likely to expect you to cover that in your down payment. This can slow everything down.
You Can Still Buy Even With a Thin Credit Score
While this is not likely to be a problem for many retirees, if you have historically avoided using credit, have lived and worked overseas or are recently divorced or widowed, you may not be able to get a mortgage right now. It can take years to bulk up a thin credit score.
You Are Protected From Suddenly Not Being Able to Pay Your Mortgage
This is a higher risk for retirees and those soon to retire, because your health may change your financial situation at any time. Many financial advisors recommend trying to be mortgage-free by the age of 65.
You Have Your Retirement Income Free and Clear
Bear in mind that if you need extra cash, you can take out a home equity loan or a reverse mortgage. Reverse mortgages are tricky, though, especially as your estate must pay them back when you die. Or you can hit huge problems if you move to assisted living. Home equity loans are a better option for most retirees.
So, it might seem that the best option is always to pay cash. However, there are reasons why you might want to take out a mortgage instead.
Homebuying for Retirees: Reasons to Take Out a Mortgage
The most obvious reason to take out a mortgage is to keep your savings free for other purposes. You might experience medical bills, have to go into assisted living, or simply want to spoil your grandchildren or take that cruise you’ve dreamed of your entire life. But there are other reasons you might consider this option too:
You May Be Able to Get More Money From Investing Your Savings
Your investments might pay off more than you will save in closing costs and interest. It’s a very good idea to talk to a financial advisor about this. They can help you do the math and determine which is better for your specific situation.
The Home Needs Major Work On It
What if you’ve fallen in love with a home, but it needs work? You might want to take out a mortgage and spend your savings on fixing the home up. You might also want to keep money free to disability-proof your new home, such as redoing the kitchen or widening doors. Disability-proofing can allow you to stay in your home longer before having to move to assisted living.
You May Have to Sell Your Existing Home
This can leave you temporarily homeless and having to spring for a short-term rental or rely on relatives while you find a new home. Depending on the market, this can take a while.
Mortgage Payments Are Tax Deductible
Those deductions can give you an advantage come April. Again, this is a good thing to talk about with a financial advisor.
Having More Equity in Your Home Can Cause Problems
This is true if you have to file for bankruptcy in many (but not all states). Florida and Texas exempt the full value of your home, but other states only exempt your equity. So if you own a $500,000 home outright and you owe $100,000, you can be forced to sell your home to pay off the $100,000. If, however, you only have $80,000 equity, then you can’t, because your equity is lower than the limit.
This only protects you until you have paid off part of the mortgage, but with medical bankruptcy so common, this is a consideration when it comes to homebuying for retirees.
Homebuying for Retirees in a 55+ Community
Buying in cash is not a no-brainer, although you may feel it’s the safest course of action to keep your home safe, especially if you don’t have other debt. However, if you’re downsizing into a 55+ community, buying cash can be the best course of action and help reduce your monthly expenses. You should talk to a financial advisor about what course of action will work best for you and your specific circumstances.
If you’re ready to take the next steps, let 55places help you find your dream retirement home. Get started today!
