new York
CNN
—
Moving to a new place in retirement is not uncommon. But Deciding whether or not to take out a new mortgage to buy a home is a big deal.
Much of your financial life changes as you move from a stable salary to a mix of fixed and variable income and a new lifestyle. SO Adding significant debt to the picture is not an easy decision.
This is especially true now that mortgage rates are hovering around 7% and property prices continue to rise. “Every time you take on debt, you increase the risk in your situation,” said Jim Stork, a certified financial planner based in Illinois.
Last year, more than a third (35%) of home buyers were ages 59 to 98, according to data from the National Association of Realtors. Within this group, a majority financed their purchases.
Whether taking out a new mortgage is right for you depends on many factors, including how you demonstrate to a lender that you are a good credit risk, as well as how you feel about the debt and the ongoing cost of servicing it. ‘a house.
If you’re worried that you’ll be less attractive to a mortgage banker because you’ve reached retirement age, be aware that it’s illegal to discriminate against anyone applying for a mortgage based on their age.
The main focus of lenders will be on your ability to repay your mortgage loan with your different sources of income other than salaries.
“When you qualify for a mortgage, it all depends on your income,” said Melissa Cohn, regional vice president at William Raveis Mortgage.
That, and of course any debt you have that will eat up your income, but we’ll get to that in a minute.
Sources of income considered by lenders, in the absence of a regular paycheck, include: Social Security benefits, pension or annuity income, spousal benefits, disability benefits, interest and dividends and your 401(k) or IRA.
If part of your income is not taxable, the lender may consider it worth 25% more. Fannie Mae offers this example: Let’s say 15% of a $1,500 monthly Social Security benefit is tax-free. This means that $225 will not be subject to tax ($1,500 x 15%). And 25% of that is $56 ($225 x 25%). Thus, $56 can be added to a person’s Social Security qualifying income amount ($1,500 + $56 = $1,556).
If you want to use your nest egg, there are different methods you can use to calculate how much income it would bring you. There is the asset depletion method in which your eligible assets are divided by the term of your loan. For a 30-year mortgage, this would be 360 months. If your IRA is worth $700,000, that translates to $1,944 per month ($700,000/360). “You never have to take money out, but you can use your assets (to qualify for a mortgage) as if you were going to take distribution of them,” Cohn said.
Another option: If you’re at least 59 1/2 years old, you can begin taking monthly distributions from a penalty-free IRA – or a 401(k) if your plan’s rules allow – and the Lender will count this as income as long as you show you have sufficient funds in the account to continue receiving the same monthly distribution for three years. Once you close on your home, Cohn said, you can cut back or stop taking distributions if you wish. That supposes you’re not yet 70 when the IRS requires you to start taking minimum distributions, said Mark Luscombe, principal analyst at Wolters, Kluwer Tax & Accounting.
Lenders will also assess your debt-to-income ratio, because regardless of your income, the bulk The question is how much will be consumed by your debts.
The debt portion is made up of your scheduled mortgage payment plus any outstanding credit card, student loan, car loan, or other debt you may have. Generally speaking, for conventional loans, your DTI ratio can be as high as 50%, Cohen said. That ratio drops to between 43% and 45% if you take out a jumbo loan, she added. A jumbo loan exceeds the conforming loan limits in the area you wish to purchase.
But ideally, your debt level will fall well below these maximum limits, both for the lender’s sake and yours.
And of course, the higher your credit score, the better interest rate you can get on a mortgage.
Before you even apply for a mortgage, have a good idea of your expected monthly income and expenses in retirement.
Compared to pre-retirement income, “most (new retirees) see a decline in their income,” said certified financial planner Lori Trawinski, director of finance and employment at AARP.
While some expenses may also decrease — for example, work-related costs like commuting — others may increase over time, Trawinski said, such as medical expenses, property taxes, homeowner’s insurance and public services.
Of course, you can downsize and move to a less expensive area. But if you stay close to where you lived during your career, your expenses may increase over time.
Additionally, Trawinski noted, if you’re married, consider what will happen to your household income if one spouse dies. This will help you assess your future comfort level for carrying a mortgage. “People often don’t plan for the death of their spouse. When this happens, your income can be significantly affected,” she said.
If you’re moving to a new state or area, consider renting first. You can get a better idea of the cost of living in the area and decide if it’s right for you. As Stork said, “Florida in August isn’t as fun as Florida in January.”
How much are you really willing to take on? All the usual financial decisions related to buying a home apply regardless of your age. But, especially in retirement, you don’t want to take on more debt than necessary, since the cost of a mortgage is fixed, but the returns on your investments, the real estate market and your health needs vary.
At the very least, Stork said, ask yourself if you can put down enough money — at least 20 percent — to avoid having to pay private mortgage insurance.
Beyond that, ask yourself if you feel comfortable maintaining – and paying for – the upkeep of a home. Maintenance can add up to 2 percent per year of your home’s value, Stork said. That works out to $10,000 per year for a $500,000 home. Maintenance is essential to preserving the value of your home if you ever decide to sell it.
How would your mortgage interest rate compare to a reasonable rate of return on your investments? The decision to get a mortgage was much easier for retirees when rates were historically low – around 3% – and their nest eggs were earning much more. “But at today’s rates, it’s a much more difficult calculation,” Stork said.
This is especially the case if you are a very conservative investor. “If your CDs earn 4% and a mortgage costs you 7%, you will lose money every day on that decision,” Stork said.
To get the most accurate read on what makes financial sense, compare mortgage expenses to your after-tax investment returns, Stork noted.