Soon-To-Be Retirees Ponder Downsizing Their Home

Gail and Allen love their historic Victorian home. It was a “dream come true” purchase made, for better or worse, right before the real estate bubble burst. But with its multiple floors and steep staircases, the house may not suit them in retirement. Both have health concerns that could affect their future mobility, and the upkeep is considerable.

So they visited their financial advisor to discuss the notion of buying a smaller home soon after they retire in the near future. Their advisor began by noting that it was good Gail and Allen didn’t need to move right away, because the idea wasn’t necessarily a slam dunk.

Now and later

First, they’d have to think through how a home purchase would affect them financially — both immediately and in the long term.

Would they have enough cash for a down payment? They’ve yet to pay off their mortgage, and the couple was unclear on just how much equity their Victorian had lost. Lenders are typically asking for 20% up front, which has some retirees dipping into their savings. This money may be better off staying in their retirement funds to continue growing tax-deferred (or, in the case of a Roth account, tax-free) or being set aside for medical costs.

Second, will Gail and Allen be able to afford home ownership during retirement when their income is lower? Even a smaller home will require mortgage payments, maintenance expenses and property taxes. They could look into a condo, but these often feature newer amenities, as well as association fees, that can make them unexpectedly expensive. The couple might find it more economical to rent.

Other matters

Another issue is the potential difficulty of getting a mortgage for the smaller home. Although lenders are forbidden from discriminating against borrowers on the basis of age, the couple will face very strict lending requirements. They should expect to have their cash flow, debt load and credit history scrutinized.

On a more positive note, as homeowners, the couple could continue to enjoy certain tax breaks. These include the property tax deduction and the mortgage interest deduction.

A weighty subject

The tax benefits and other advantages of homeownership were enough to convince Gail and Allen to put their house up for sale and see what offers the market generated. But they valued their financial advisor’s cautionary advice and promised to check in with him regularly regarding the progress of the sale.

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