If you are over 60 and you buy a house, should you get a mortgage or immerse yourself in savings and retirement?
My husband and I blew up the Champagne the day we paid our mortgage. Like many baby boomers, we have worked hard throughout our lives to make sure we are debt-free at retirement. We saved savings in our 401 (k) if invested in sweat shares in our home in the North East, built in 1917. Owning our free and clear home gave us peace of mind as we approached our 60s.
With our children and grandchildren spread across the country, we were ready to resize and drive our Subaru wagon train out of the west in search of a new home.
But only two weeks after her retirement, my husband was diagnosed with a rare terminal condition. He died six months later.
Who could have predicted that before the end of the year I would buy a house in Henderson, Nevada, sell our Pershing Avenue home in four days and sign a 30-year mortgage at the age of 63? Certainly not me, my family or longtime friends.
What appeared to be a rushed and impetuous act turned out to be one of the best decisions I have ever made.
It wasn’t my deep pain that made me do it. It was a desire to live life for all that was worth.
With the loss of my husband, the old adage “life is too short” hit me like a ton of bricks. A mortgage would release money for the active lifestyle that my husband and I had prepared. And wherever he was, I knew he was giving me the thumbs up.
A growing number of seniors choose the same path, even if they have the financial means to buy a new home or condominium with cash.
About 42% of families led by someone between the ages of 65 and 74 have a guaranteed home debt, according to the most recent Federal Reserve consumer finance survey. And as more retired boomers become active in the real estate market, that number should continue to rise. It was 18.5 percent in 1992 and 32 percent in 2004. Reports from the Center for Retirement Research at Boston College and the U.S. Census Bureau reflect similar trends.
As long as you have enough income for monthly payment and fixed living expenses, an affordable mortgage can give you flexibility and liquidity for travel, meals away from home, home improvements and unforeseen emergencies, so you don’t feel running out of money in retirement. And, if you want to help an adult child with an unexpected expense, you can easily tap into what amounts to his legacy.
Experienced seniors are attracted to low interest rates that hadn’t been heard years ago – they’re as low as 3.875 percent for a 30-year mortgage as this article goes to press – and a rising stock market that can keep your money working for you a higher rate of return. The new tax law has eliminated many deductions, but mortgage interest still has its advantages. An important caveat: these market conditions can change in the blink of an eye, so be sure to consult your financial advisor and know your tolerance for risk.
How can you determine whether taking on debt as an older adult is right for you?
As with borrowers of any age, you will need to demonstrate your ability to repay it. Your credit score, debt-to-income ratio, and three-year income stream – which can be more difficult to document once you leave the workforce – will determine if you qualify. Some lenders will take into consideration all your financial activities and find a way to derive an expected income.
However, it’s best to plan ahead and, if possible, consider taking on that new mortgage while you’re still working, recommends Coleen Colero, my mortgage maker at Sun West Mortgage Company Inc., in Henderson, Nevada.
“I always suggest buying the retirement home as a second home before retiring and continuing to work. Sometimes you can qualify more easily than waiting for retirement and / or social security to start, “says Colero,” Waiting for social security earnings could be more beneficial in the long run, so you can get the biggest monthly benefit. at 66 or 70. “
If you are already retired, like me, the mortgage company will ask for proof of retirement, withdrawal of investments from IRA and annuities, social security earnings and any part-time earnings. The lender will also review your debt and credit score.
“A larger mortgage is okay as long as you’re in debt at 40 to 45 percent,” says Colero, pointing to another benefit for taking a new home in a market like mine where desirable homes sell quickly. “Financing a large part of the purchase price in 30 years gives you the opportunity to buy a new home when you see it, in no hurry to sell your main home. Once you sell your home you can always put more money on your capital or deposit a part into a savings account to supplement your income as needed. “
That’s exactly what I did, reducing repayment times from 30 to 12 years after applying the proceeds from the sale of my home to the principal and creating a net after-tax nest egg for improvements and travel home. So far I have painted the exterior of my house, installed lockers in my garage (we have no basements or attics here) and created an enchanting landscape that surrounds my small house in Henderson. The excursions to Valley of Fire and Crater Lake are on the horizon and I am renewing my passport in case there is an opportunity for international travel. I have Libby Remache to Howard Hanna, who sold my home in four days, and Augie and Chris Fetcko of Hidden Worth LLC, who managed my property sale, to thank me for giving me this option.
If you are thinking of taking on new retired debts, the experts advise you to:
Pay off the balances and make timely payments to improve your credit score, which, as a general rule, should be 720 or higher to qualify for a loan.
Make sure you have access to six months of living expenses ready.
Think long term. With the life expectancy of the 1980s and 1990s, retirement savings will have to last 20 to 30 years.
Know your limits. Create a budget and live according to your means. If you are used to paying bills on time and your net worth has increased over the years, you are a good candidate for a mortgage later in life. But if you have limited financial savings and have a tendency to use your credit card to pay for things you can’t afford, freeing up more money with a mortgage will only aggravate the problem.
Consult with a trusted financial advisor and speak with a loan expert long before signing on the dotted line.
One of my biggest regrets in downsizing was leaving my book library. Here is a custodian: “The value of debt: how to manage both sides of the budget to maximize wealth” by Thomas J. Anderson. LEL