Whether you’re planning to downsize or buy a second home in retirement, you’ll likely need a mortgage to help you do it. In fact, even if you’re staying put in a fully paid-off home, a mortgage might still be a good move for your finances (as long as it’s the right type of loan).
Are you starting to plan ahead for how you’ll handle housing costs in retirement? Are you already retired and looking to better manage your expenses? Here are the mortgage loans that can help you do it.
Fixed-rate Mortgages
If you’re looking for a consistent monthly payment, a fixed-rate mortgage loan is your best bet. These come with set interest rates for the entirety of the loan, making it easy to budget for and manage.
The downside is that they only come in 15- and 30-year terms. If you don’t plan to stay in the home that long, you might end up paying more in interest than anything else. It could also leave your loved ones with lots of debt to pay off.
If you’re considering a fixed-rate loan, you can choose from:
FHA loans – These offer low interest rates and have loose credit and income requirements. They’re guaranteed by the Department of Housing and Urban Development.
VA loans – Designed for veterans and military members, these offer low rates and require no down payment. You can also roll your closing costs into your loan balance.
USDA loans – If you’re buying a home in a rural area, you might be able to use a USDA loan to purchase it. These require no down payment whatsoever.
Conventional loans – These loans have low interest rates, but they also have higher credit and debt-to-income standards than other loan options.
Home Equity Conversion Mortgages – Also called HECMs, these can be used to purchase or refinance a home. They allow you to pull money out of your home, either as a lump sum or via a fixed monthly payment. (More on these loans below).
Pros
- Consistent monthly payment
- Easy to budget and plan for
Cons
- Long loan terms
- May mean leaving behind significant debt
- Available with many loan products
Adjustable-Rate Mortgages
If you really want to lower your up-front costs of buying and owning a home, then an adjustable-rate mortgage might be a better option. ARMs, by definition, come with interest rates that change over time. They start off much lower than fixed-rate options, but after a certain number of years (usually 3, 5, or 7), they increase, thus sending your monthly payment up with them.
If you’re only planning to be in the home for a short period, they can be a good way to lower your monthly payment, as well as the interest you pay over time. ARMs are available as FHA, VA, HECM or conventional loans. The USDA does not offer adjustable-rate loans.
Pros
- Low interest rates
- Short loan terms
- Low monthly payments at the outset
Cons
- Could mean an increase in payment over time
- Not available on all loan products
Home Equity Conversion Mortgages
HECM loans are a type of reverse mortgage reserved only for adults 62 and older. They’re a great option if you need additional funds in retirement because they allow you to turn the equity in your home into viable cash. You can opt to receive this cash as either a lump-sum payment or via a regular, monthly payment (much like your Social Security check).
These come in adjustable-rate and fixed-rate options and don’t need to be repaid until you sell the home, refinance it, or pass on. At that point, the bank uses the home to pay off the mortgage. The main downside of HECMs is that the FHA collects a premium on the loan balance every year. This serves as insurance in case the home is worth less than the mortgage debt owed when you pass on.
There are other types of reverse mortgages, but they aren’t regulated by the FHA. This means you may need to meet higher debt-to-income and credit score requirements in order to qualify.
Pros
- Available for refinance or purchase
- Offer lump-sum or monthly payments
- Protects your loved ones from any remaining mortgage debt
- Requires no monthly payments
- Closing costs can be rolled into the loan
Cons
- Requires mortgage insurance
- Loan balance increases over time
- May lessen any inheritance you give to your heirs
Other Home Loans for Seniors and Active Adults
If you already have a loan, you have additional mortgage options as well. For one, you can choose a cash-out refinance. This allows you to refinance your existing loan, while also taking out a lump-sum cash payment in the process. The total cash you can tap depends on how much equity you have in the home.
A Home Equity Line of Credit (HELOC) or Home Equity Loan are also options if you already own a property. These also allow you to turn your home equity into cash, though they also function as a second mortgage loan. You’ll need to make an additional monthly payment in order to pay them down.
