Many Boomers are retiring. Many, many more are facing empty nests and considering downsizing their homes, which means buying new property. Since buying real estate isn’t something you do every day, it’s a good idea to brush up on a few key terms and ideas before you make any decisions or give serious consideration to any mortgage quotes.
The reason is simple. Mortgage quotes are not all created equal. Some are better than others in general and some may be better for you in your unique situation. Before you buy new real estate in retirement, it’s a good idea to gather a few facts about mortgages, mortgage quotes, and making informed financial decisions.
Why Buy New Real Estate Now?
You’ve probably spent many years in the same home. You may have your current home paid off, or be getting very close. With that in mind, why would you consider taking on a new home, and mortgage payment, now?
There are many reasons people make the decision to move during retirement. Some of them are practical in nature. You simply no longer need a house as large as the one you lived in while your children were living at home. Other reasons are about proximity to adult children (and your grandchildren) who may have made their homes in other cities or states.
If you are moving to be closer to family, you might be shocked to run the numbers. It is often cheaper to buy a home than it is to rent one, according to Next Avenue. Even renting apartments today can carry stiff price tags. This is especially true if you are able to claim the mortgage interest deduction on the home you buy as it serves to help your tax situation in a way renting never could.
Of course, this only works to your advantage if you choose the right mortgage to meet your needs and your current financial situation. These are a few key elements of a mortgage you need to understand before applying for a mortgage.
What is the Mortgage Term?
Essentially, your mortgage term is the number of years (or months) you have to repay the loan. For the most part, mortgages today are for a 15 or 30 year term. This means that you take out the mortgage and have 15 or 30 years to repay the loan. Each one offers distinctive advantages to buyers. Loans that are repaid within 15 years, for instance, will cost considerably less. They will build equity faster, and provide the peace of mind that comes with paying off a home more quickly. The downside, though, is that the monthly payments can be quite a shock.
However, if you’ve sold your existing home and applied the total amount of the sale toward the down payment on your new home, you may be able to make the shorter term work for you. With more retirees leading long and active lives, it’s worth considering a newer home that will have lower maintenance, and lower maintenance expenses, than the home you’ve been living in for the last 30 years or more.
The 30-year term offers lower monthly payments and a longer term to repay the loan. Unless you’re concerned about not having an adequate income to pay the monthly mortgage after 15 years, this option provides greater flexibility when it comes to your monthly obligations – even if you can easily cover the shorter term. For some people in your situation it comes down to legacy and what you prefer to leave behind for your family down the road. If you want the house to be paid off, free and clear as quickly as possible, then the shorter term is your best choice. Otherwise, the home will have substantial equity and your children can work together to decide what to do with the home when that time comes.
Understanding Mortgage Rates
Prior to the bursting of the housing bubble, many people were shocked to learn that the low interest rates they had on their home loans was only temporary. They were victims of predatory lending practices and had received adjustable rate mortgages, also referred to as ARMs, rather than fixed rate mortgages.
What this means is that specified terms throughout the life of the loan, the interest rate will be re-evaluated and re-calculated — adjusted. People who had previously had very reasonable monthly mortgage payments could no longer afford their homes once those initial adjustments were made.
That doesn’t mean that all ARMs are bad. Some people actually choose adjustable rate mortgages. There are times when this is beneficial, though there is always an element of risk involved in this type of loan. With interest rates today being at historic lows, and having been there for so long, the odds are not in your favor that it will remain this low indefinitely.
The initial appeal is the fact that introductory ARM rates are much lower than the interest rates for fixed rate loans. Your interest rate is what determines how much above the borrowed rate you end up paying for your home.
For people who are retired now or have plans to retire within the next five to ten years, a fixed rate mortgage is the better option. Fixed rate mortgages allow you budget your monthly mortgage payments for long-term planning without concerns of variations having a negative impact on your household budget.
Buying real estate as you approach retirement or shortly before or after can be a huge step. If you enter into the decision by informing yourself about key terminology and information about the loan, you’ll find that you’re far more comfortable with your decision to purchase a new home and better prepared to manage the financial requirements of home ownership. The one great thing about buying a new home is that it is a solid investment that almost always gains value over time – a great idea for building value as you approach retirement and beyond.