It's less expensive to downsize as you go into retirement. This can also help to improve your financial situation. However, before you start shopping for a retirement home, make sure you understand a few things to expect.
What will your Retirement Budget Allow for with a Monthly Payment?
Retirement means you have to be prepared to live out your years without a regular income. You may have something coming in every month from Social Security, a Pension or another source, but likely, you'll be living off a lump sum you've saved, plus the interest.
You may be planning to take out a 30-year mortgage because of the lower payments. However, if you retire at age 65, this means you'll be paying a mortgage payment until you're 95. Make sure you look at all your monthly expenses before you consider how much of a mortgage payment you can handle. If possible, buy your retirement home before you retire and start paying the mortgage down now.
Factor in Additional Cost of Owning a Home
As a retiree, you still have to deal with homeowner's insurance, repairs, maintenance, HOA fees and other expenses that come with homeownership. Make sure you consider all of these costs in your budget. You don't want to set yourself up for failure and there are some things you can do to ensure your housing costs are lower each month. By putting 20% or more down, you can avoid paying private mortgage insurance. In addition, if you move to the right state for retirement, you can avoid certain taxes and you may also gain other benefits when it comes to other housing costs.
Will Retirement Allow you to Qualify for A Mortgage?
Often, retirees don't have an income and won't qualify for the best mortgage possible. Unless you will be buying your new home with the proceeds from the sale of your current home, you'll likely need a mortgage. As a retiree, you may struggle to get a mortgage because you won't have an income to help keep your debt-to-income ratio low enough. Even great credit may not help in this situation. Buying your retirement home before you retire can help, as you will have a better chance of qualifying for a mortgage, especially if you've paid off your current home. Look into the options and make sure you're prepared before you retire.
Choose the Right Mortgage Term
As mentioned earlier, if you retire at 65 and take out a 30-year mortgage for the lower payments, you'll be paying on your retirement home until you're 95. This may not be ideal, but you don't have to take out a 30-year mortgage. Instead, you can choose a 10-year or 15-year mortgage. This means you'll have your retirement home paid off much sooner, but you'll have a larger payment now. Preparing for retirement is a big task. It's best to pay off your current mortgage or at least pay it down as far as possible. Selling your current home will give you proceeds you can use to pay down or even pay off your retirement home. Make sure you're ready for all the costs of buying a retirement home before you start searching.