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Ask Brian: What Financing Options Make Sense for Our Last Home?

By Brian Kline | January 22, 2019

Ask Brian is a weekly column by Real Estate Expert Brian Kline. If you have questions on real estate investing, DIY, home buying/selling, or other housing inquiries please email your questions to [email protected].

Question from Cathy of Medford, OR: Hi Brian, My husband and I plan to retire in about 4 years. Our last child started college last year. Today we have a much larger home than the two of us need. We’re planning to buy a smaller home, probably in a retirement community, in the next couple of years. The biggest challenge we face entering retirement is that we had planned having our mortgage paid off. We’ll have a substantial down payment for our last home but we anticipate needing to take out about a $100,000 mortgage. What options should we be looking at?

Answer: Hello Cathy. I’m certain there are a lot of people facing the same question. Fortunately, you have many options. For one thing, you could consider moving to a less expensive location where the equity in your current home is enough to pay cash for a smaller home. If you want to stay where you are and know you will still have a mortgage after retirement, you should build a bottom up budget to determine how much you can afford as a mortgage payment each month. This needs to include both your retirement income and expenses with a prudent reserve for emergencies.

Whatever you do, don’t create your retirement budget based on today’s working income. It’s extremely rare for retirement income to meet or exceed retirement income. On the other hand, you have considerably fewer expenses in retirement. The daily commute goes away, less is needed for clothing, no professional fees, etc. However, and this is unpleasant to think about, what happens if one spouse passes away before the mortgage is paid off? Can the other afford the mortgage on only one retirement income?

Once you know how much you can afford, you still have options about how much you pay towards a mortgage each month. If you still want to reach your original goal of having the security of a paid off home, you can pay the maximum amount towards the mortgage over the shortest amount of time. For instance, taking out a 10-year mortgage and making extra payments to pay it off in 8 years. If you did this soon (before retiring), you would only being paying on your mortgage for 4 years after retiring. You’ll save a lot in interest payments by doing this. You might also consider refinancing into a 30-year mortgage shortly before retiring. This would cost you another round of closing costs but the much smaller payment would impact you retirement income less.

Either way, something important to consider about your last home are maintenance and repair costs. Generally, the older the house, the more maintenance costs you can expect. Even if you’ve done most of the maintenance yourself, as age creeps up, you may find a need to hire help for more of it. That includes lawn care. Most retirees want less maintenance.

If you buy a new home, it will come with a warrantee for a limited time. You should also expect less repair costs with a newer home but not much less in maintenance. Also, during your budgeting, be sure to factor in taxes and insurance. These are currently wrapped into your mortgage payment but don’t go away when the mortgage is paid off.

Cathy, it’s great that you’re having this conversation several years before retirement. The sooner you begin, the more options you’ll have to consider. Another option is selling your current home but not using all of the money towards the smaller home (take out a bigger mortgage). You could use the money for other purposes. If you will have good income in retirement, you may not want to be “house rich” but “cash poor.”

Your retirement should be stress free and enjoyable. Making the wrong housing decision can cramp your plans. It really is wise to first determine your retirement budget. You may have budget options such as withdrawing a lump sum from a 401k account. But that has significant tax implications. If this all seems overwhelming, consulting with a financial planner is a good idea. The best plan will come when you sit down with a financial planner and already know what many of your options and preferences are.

Cathy, there is not a one-size-fits-all home solution for retirement. But you are on the right track by beginning sooner rather than later.  

Please comment with their thoughts and experiences about buying a retirement home. Our weekly Ask Brian column welcomes questions from readers of all experience levels with residential real estate. Please email your questions or inquiries to [email protected].

Brian Kline has been investing in real estate for more than 30 years and writing about real estate investing for seven years with articles listed on Yahoo Finance, Benzinga, and uRBN. Brian is a regular contributor at Realty Biz News
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