Should I Get a Mortgage in Retirement?

Posted by Tamara Berryman on Monday, September 22nd, 2014 at 1:35pm.

More than 1,000 people relocate to Florida every day, with a whopping 537,000 new residents coming from other states, most notably in the midwest and northeast. The U.S. Census' American Community Survey estimates that by the end of this year, the Sunshine State will surpass New York in population. Of those state-hoping residents, about one-tenth came from New York, and two-fifths of all transplants were under 25. New residents over 65 remain a large part of the peninsula's demographics.

That means, of course, that retirees are a substantial part of those who come to the state to take advantage of low property taxes, no state income tax, and a great business-friendly environment. Obviously, the wonderful weather which make the costs of utilities relatively lower than other parts of the nation is a big part of the decision to move. Add to it first rate amenities and no end of recreational outdoor opportunities and it's little wonder why people move to this subtropical paradise.

It also necessarily means having to find a place to reside, which is made even more sweet by near historical interest rates, for those who opt to buy a home. Home prices remain affordable, and for soon-to-be retirees, as well as those already in retirement, that is certainly a sound financial proposition. In addition, many retirees elect to downsize, which also works in their financial favor as they then can purchase a less expensive property in a more desirable location.

Proper Financial Planning prior to Purchasing a Home

If you are retired or planning on working a bit longer, you've probably built-up a lot of equity, along with a nest egg and those comprise your most valuable possessions. It's proper financial planning before you buy a home that's going to be key. If you sell the home you are leaving in another state, chances are excellent there's a good amount of equity (read: profit) that you'll take away from the transaction. Leverage a smart portion of that to put-up a strategically calculated down payment so you can enjoy a really low monthly mortgage payment. Speak with a licensed, experienced adviser to sort out the details.

"Regardless of the borrower's age, sufficient income will be required to obtain a mortgage. Some elderly people still earn paychecks or are self-employed. Others use non-employment sources of income, such as Social Security benefits, a corporate, government or military pension, capital gains from investments, interest income or property rents, to qualify. [S]ome older homebuyers are more receptive to financing today than they might have been in the past, in part because they're reluctant to part with cash reserves." --Bankrate.com

Take the rest of the proceeds and put them into a sound investment vehicle, along with your existing savings. If you find an adequate home that fits your needs and is below your budget, carefully evaluate any other expenses, such as improvements and homeowner association fees. The goal is to purchase a residence that will be comfortably under any equivalent rental property that will build equity as the market continues to steadily rebound. It will then serve as a worthwhile inheritance asset to pass-on to children.

How to Get a Mortgage in Retirement

New Freddie Mac and Fannie Mae rules are very good news for retirees. Prior to the change, banks were limited to credit score and income as a means of qualifying retired applicants for a home mortgage loan. Now, that's changed, and those applicants who are fully vested with unfettered access to their retirement account have another option. Up to 70 percent of the assets are used for qualification purposes, less any closing costs and the down payment. The remainder is then divided by 360 months.

For those who remain working, the formula changes, but it's up to their circumstances. Depending on your current income and status of your retirement account access, plus any other assets you may own, there are other ways to take out a mortgage. What's more, some financial planning experts advise their clients to take out a loan with a term longer than they expect to live. This lowers the monthly payment amount, leaving in-place a substantial part or most of their nest egg.

Another key component is to know what's in your credit file. These are notorious for being plagued with inaccuracies and those mistakes can be costly to you. Pull your credit report, it's available once a year from all three bureaus, at AnnualCreditReport.com. Do this early on in the process to give yourself time to deal with disputing errant entries to go into the loan process with a higher credit score.

Of course, financial planning experts do suggest that if you have the means of paying cash and avoid taking out a mortgage, you do so, provided that it won't negatively impact your budget. You'll have instant, 100 percent equity that will only increase in value as property values continue to climb.

Tamara Berryman
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