Home financing for active retirees is a complicated process, especially in today's financial environment. Generally speaking, fixed rate mortgages, or FRMs, are a better option for retirees who are on a single-source fixed income.
The decision to get a 30-year or a 15-year FRM depends entirely on the level of that income. A retiree should not have more than 30-35% of his or her monthly income going towards the mortgage payment, as the "other" costs of living can add up quickly, and funds should be kept available for any increases in medication or hospitalization expenses. The fixed rate mortgage helps to prevent the retiree from any "payment shock" in the future which may lead to a situation where he is unable to continue making payments.
Adjustable rate mortgages, or ARMs, should only be chosen by those retirees who have multiple sources of retirement income, such as 401K, IRAs, stock market income, etc. These retirees have more income to devote to savings and are generally able to absorb any increases in their monthly payments when the rate adjusts at the end of the initial rate period.
Adjustable rate mortgage terms should be reviewed carefully by the retiree, and his financial advisor, if applicable. ARMs often have "hidden" terms such as prepayment penalties and additional costs. If the retiree finds any of these penalties in the ARM disclosures, or explanations, he should request further information, or a different type of mortgage.
One type of ARM, which should be avoided by all retirees, regardless of source(s) and level(s) of income, are the "Option ARMs.” These mortgages give the retiree the option to "pick" a payment level each month. While this sounds like a fantastic idea, in reality is not. These types of loans invariable lead to a situation called "Negative Amortization Loans," meaning the retiree now owes more than his home is worth. This will also prevent him from being able to refinance into a more stable mortgage in the future, and often leads to foreclosure.
For retirees who have the ability to choose between paying cash for their new home, and obtaining financing towards the purchase, the decision is an intensely personal one that needs to be reviewed carefully by the retiree, his financial advisor and his attorney. There are tax benefits to obtaining financing now that individuals are able to claim a deductible for interest paid on both a first and a second lien (which are most often home equity lines of credit, or HELOCS). This benefit needs to be weighed against the monthly outgoing payment, and if the retirees income can bear that cost.
Retirees who are planning on setting up an estate for future generations also need to weigh the benefits and costs involved with encumbering their property. Different states have different laws regarding estate planning and beneficiary requirements, as well as the federal regulations regarding estate taxes. Retirees may find that it is best to finance their new home and obtain an insurance policy, which will pay the mortgage off in full upon their death — the best option for ensuring the financial freedom of their surviving beneficiaries.
Again, however, this is a decision that each individual retiree must make after thoroughly discussing all costs and benefits a financial advisor and/or attorney, as it will also affect the estate planning already in process. In short, there is no "one-size-fits-all" home financing solutions for retirees. The decision needs to be made on a case-by-case basis, tailored to the individual retiree's current financial situation, as well as his future prospects — both in the financial sense and in a "health and well-being" sense. This planning should be done with the help of a financial advisor and an attorney who specializes estate planning. If the retiree is on a fixed income and unable to pay for personal representation, most states have free state advisories that can help individuals work through the information and make an informed decision.