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mortgage in retirement

Is It a Good Time to Sell and Downsize Your Home?

by Maggie Leave a Comment

interior of a house - sell & downsize your home today

Many people blame the baby boomers for the housing shortage in the real estate market. According to stats, baby boomers hold the biggest share of real estate wealth in the U.S. And they do not sell their homes as they grow older.

Recently I have learned that there is approximately $8 trillion worth of home equity locked up in older people’s homes.

Housing experts agree that the baby boomers’ generation is healthier than the previous generations. That is why they do not need to move in with their kids or to a nursing home. Also, they do not want to move because they want to age in place. Most of them like their neighborhoods and their friends.

But with skyrocketing home prices, some people think that now is a good time to sell and downsize your home before the real estate market starts cooling off.

Downsizing can be the right path for many baby boomers who want to cash out their biggest asset and live out their golden years with more money in the bank.

Everyone likes the idea of making a profit by selling a big house and buying a small one. But be careful with this decision because today’s market might present some challenges.

High home prices, low inventory

For a long time, downsizing has been associated with empty nesters living in a big house with no kids.

A popular retirement planning approach is to sell a big house you raised your kids in and then go and buy a smaller less expensive house. The best part of this approach is that you can use all your home equity you accumulated over the years to pay for your life in retirement.

But in recent years, the concept of a smaller house has captured our society. Downsizing has become more attractive for many financial reasons.

  • Less space means less money, less maintenance, and less hassle overall. And the smaller space the easier it is to furnish and decorate. Also, you can spend the saved money on something more important such as travel, hobbies, and time with the family.

After all, a smaller space has more value not only for your wallet but for your lifestyle.

However, with inflated home prices downsizing is not as affordable or profitable as it was before. If you think about cashing in on your home’s equity and downsizing to something smaller and cheaper, you might meet some challenges.

If you decide to sell now, you will be selling at the top of the market with high home prices and low inventory. But on the flip side, you are going to spend more money for your next purchase even something smaller.

When downsizing you will be looking at the smaller homes with modest square footage. Keep in mind that there are a lot of buyers competing for this kind of purchase. Smaller homes, condos, and townhouses became very popular lately and that often leads to steep bidding wars.

In many cases that smaller home you want to buy may end up being more expensive than you have originally planned.

When you sell and downsize your home do not forget about other expenses such as real estate agent fees, attorney fees, real estate, and capital gain taxes.

  • Prepare to pay 5 to 6 percent of the purchase price to cover realtor agent fees, which are typically paid by the seller. Add to that an extra 2 to 4 percent of the price to cover attorney fees, transfer taxes, and other expenses called ‘closing costs’.

So, if you sell your home for $750,000, you could end up paying $37,500 in realtor fees and $15,000 minimum in closing costs. Total of $52,500 just to sell your house.

  • Capital gains tax is another costly part of selling your home. Per IRS rules you do not need to pay capital gains taxes on the sale of your home if the profit is less than $250,000 (for an individual) or less than $500,000 (for a couple). But if your sales proceeds are higher than these numbers you will owe to IRS as much as a 20 percent capital gains tax on the profits.

If you live in a state where homes have appreciated in value significantly over the years, it might cost you a lot in capital gains taxes. For example, after selling your home for $750,000, you will pay to IRS $50,000 capital gains tax on a $250,000 profit.

High mortgage rates

Mortgage rates have increased more than 2.5 percent since the beginning of this year. And if you are planning to finance your new home it will be significantly more expensive than it was a few months ago.

  • According to Freddie Mac, today’s average mortgage rate is 5.78 percent on a 30-year loan. By comparison, in 2021 a 30-year fixed rate mortgage was only 2.93 percent.

If you have a mortgage on your current home with a low-interest rate and looking to downsize and borrow money for your next home, keep in mind that the rate you can get will be much higher than your existing one.

Unless you want to pay cash for your new home, downsizing might not be worth it financially if you want to apply for a new mortgage.

If you are retired and live on a fixed income, downsizing will give you some significant savings down the road. But you have to compare it with how much interest you will pay over the time of the loan.

  • With the average interest rate of 5.78 percent on a 30-year loan, you will pay around $443,000 in interest costs on a $400,000 home.

Also, qualifying for a mortgage might be a problem if you are not working. Keep in mind that most of the mortgages are issued and approved based on your income and not on your assets. If you are not working, it will be harder to get financing because you cannot show the constant stream of your income.

Moving cost is growing

We all know that moving is stressful. Sorting through your belongings, packing, and cleaning can be overwhelming. And with high inflation and high gas prices, your moving costs will be expensive.

  • According to the latest report from the Bureau of Labor Statistics, the annual inflation rate in May 2022 was 8.6 percent. It is the highest level since 1981 as measured by the consumer price index.

In today’s world everything involved in a move will cost you more – movers, truck rentals, supplies, storage, etc. In addition to downsizing your home, you will need to downsize and replace your furniture – replacing a big sofa and club chairs with a smaller couch, a king-size bed with a queen-size bed, or a big dining table with a smaller kitchen-size set.

Do you still want to sell and downsize in today’s market?

There are still many financial reasons to sell and downsize in today’s market. And if you are getting closer to retirement, downsizing can come with lots of benefits.

gardening - downsizing your home  today

If you are ready to sell on the top of the market and do not want to wait for the interest rates to settle because you will be paying cash for your next purchase, then go for it. Even with the high-interest rates but low inventory, sellers are still demanding a premium for their homes.

For example, you carry a $100,000 mortgage. If you want to sell your home for $600,000, then downsize to a $350,000 smaller home or condo, you might walk away with a nice profit.

Also, you can buy your next smaller home with cash, without having to take out a mortgage.

  • You still have to carefully evaluate the market where you buy your smaller home. Look at home prices, the number of listings, competition, and how long most houses sit on the market.

Downsizing your home can help you save a lot of money on housing costs. Today, rising property taxes are a result of higher home values. If you downsize from a $600,000 home to a $350,000 home in the same neighborhood, you will pay fewer taxes overall.

With a smaller home, you will also spend less money on maintenance and repairs, heating and cooling, home improvement, and decorations.

  • How to Use Home Equity in Retirement?
  • 5 Tips on How to Downsize for Retirement
  • Should I Pay Off a Mortgage Before Retirement?

Other alternatives to downsizing

If you do not want to sell in today’s market, there are other alternatives to downsizing if you want to wait for interest rates to settle, and housing inventory to increase in the next few years.

Once you are retired, you can rent your home and move to a rental. It will allow you to avoid the high home prices and high mortgage rates today’s market comes with.

  • Also, if you need extra cash but do not want to sell your home, you can apply for home equity loans, HELOCs, or consider a reverse mortgage.

There are still many people who would prefer to stay in their homes and retire in place. They want to remain in their neighborhood for life. In this case, homeownership might provide several options to fund your retirement without the risk of stock market investments.

  • One of the options is a reverse mortgage.

If your home has gained a lot in value, it makes sense to calculate the numbers first to see if it might be cheaper to stay put and take out a reverse mortgage.

Your home will continue to appreciate in value. And by staying put you will avoid paying capital gains tax completely. With taking out a reverse mortgage, you will be able to get the cash out to pay for your living expenses in retirement.

  • ‘A reverse mortgage is a loan available to homeowners, 62 years or older that allows them to convert part of the equity in their homes in cash’.

In simple words, as an older homeowner, you will be allowed to borrow money against the value of your current home.

What are your thoughts on selling your home in today’s market? Share your ideas with us in the comments below.

Have you enjoyed this blog post? Make sure to hit that sign-up button for more blog posts like this!

Filed Under: Money Management, Retirement, Retirement Planning Tagged With: downsize your home for retirement, how to sell your home, mortgage in retirement, real estate market, retirement, reverse mortgage

Should I Pay Off a Mortgage Before Retirement?

by Maggie 2 Comments

woman holding for sale sign - pay off a mortgage before retirement

For many of us, the mortgage debt is the largest in our budgets. That is why entering retirement debt-free seems ideal for many people.

Getting rid of a big debt could save you thousands of dollars in interest and free up money you can add to your retirement savings or just reduce your expenses in retirement.

It is my dream to pay off our mortgage before we retire. But I do not think it is possible. And I am not alone. According to stats, more and more people retire owing money on their homes. The Federal Reserve’s Survey of Consumer Finances showed that 37.6% of households of people aged 65 to 74 had a mortgage in 2019.

We all know that it can take decades to pay off your mortgage. But does it always make sense to pay off a mortgage before you retire?

Reasons to consider paying off your mortgage before retirement.

There are many reasons to consider when deciding should I pay off my mortgage before retirement or not:

  • You may be able to retire sooner.
  • You will have one less bill to pay each month in retirement.
  • It will provide you with more income in retirement.
  • Paying off a mortgage before retirement can reduce stress.

Also, it makes sense to pay off a mortgage before retirement:

  • If the house is worth more than the mortgage balance.
  • If the interest rate on your mortgage is higher than the rate of return on your investments.

Here is a related post you might want to read:

  • How to Use a Home Equity in Retirement

Benefits of paying off your mortgage before retirement.

Most people would be better off not having a mortgage in retirement. Getting into retirement with an unpaid mortgage will put a burden on your lifestyle.

When you are working, you have years of earned income to pay off a mortgage. But once you retire, you will be living on a fixed income. And when you start living on a fixed income, it is hard to pay off debt if you need to pull big chunks of money from your savings. Although, large withdrawals from retirement funds could push you into a higher tax bracket.

Frankly, it will make your retirement life a lot harder if you must continue to pay a mortgage when you are not working. In addition to that, you still have to spend money on property taxes, homeowner’s insurance, maintenance, and repairs.

The simple fact that you have lower housing costs means you will need less income to cover this essential expense. Also, you will have more retirement income left for other retirement expenses.

Being debt-free gives you more freedom and money left in your pocket to enjoy your golden years than struggling to pay off the mortgage.

Roman and I refinanced our house many times. But even with a low-interest rate of 2.5 percent, the mortgage payments take the biggest chunk of our budget.

Here is a list of benefits of paying off your mortgage before you retire:

  • Give you peace of mind
  • Provide you a place to live without worrying about monthly payments
  • Reduce your retirement expenses
  • Saving you money on interest

How to pay off your mortgage before retirement:

Refinance to a shorter-term loan. One way to pay off your mortgage faster is to refinance to a shorter loan term. For example, you can apply for refinancing your mortgage from a 30-year to a 15-year loan. That can put you on the fast track to paying off your mortgage.

However, it is important to remember that a shorter-term loan means higher monthly payments. Make sure your budget can handle the higher payments each month.

Refinance to a lower interest rate. Another smart option to reduce your mortgage debt is refinance it at a lower rate. In 2020 Roman and I refinanced our mortgage with Ameri Save Mortgage Corporation at 2.5 percent. It helps us bring down our monthly payments and save up to $500 a month.

Make an extra payment each month or each quarter. Look at your mortgage balance and figure out how much extra you can put toward your mortgage each month. Those extra payments can reduce your principal balance significantly.

Making an extra payment 4 times in one year could remove 10 years from your payoff date.

Every dollar you pay above your regular monthly payment helps speed up your payoff date. It does not mean that you have to start doubling up your monthly payments. Simply adding an extra $100 a month to the principal can speed up your payoff date for 5 years.

Switch to bi-weekly payments. Also, instead of sticking with the traditional monthly payments, you can start making bi-weekly mortgage payments.

When you switch to a bi-weekly mortgage payments program, you split your payment in half and pay twice each month. There are 52 weeks in a year. If you switch to bi-weekly payments, you end up making 26 payments which are equal to 13 monthly mortgage payments – one extra payment yearly.

With this strategy, you will be able to knock off a few years of your mortgage balance and reduce the amount of interest you pay on the loan.

Put extra cash towards your mortgage. Whether it’s a bonus, tax refund, salary raise, or inheritance, put every dollar towards paying down your mortgage debt.

Reasons not to pay off your mortgage before you retire.

Rushing to pay off your mortgage before retirement may not be a good idea for many reasons:

  • Paying off your mortgage early could trigger a penalty
  • You may be better off investing the money
  • You may need to borrow against your home equity later
  • You will be paying off your mortgage with savings

Tax benefits. Your mortgage interest is tax-deductible.

If you are still working and in the 35% tax bracket, every dollar you pay in mortgage interest saves you 35 cents in federal income taxes. Also, you save money on state income taxes.

A mortgage is a low-cost debt. A mortgage is one of the least expensive loans available.

If you have a credit card debt, it often comes with a higher interest rate than a mortgage. Do not rush to pay off a 2.5 or even 3.5% mortgage if you have credit card loans or other debt you are still paying off at 18 or 20% rates.

It is better to save for retirement than pay off a mortgage. As I mentioned above, mortgages are often the cheapest money you will ever be able to borrow.

Typically, mortgages have a lower rate and even fixed-rate, helping to ensure that borrowed money remains cheap for the next 15 or 30 years. That means people have the opportunity to put funds elsewhere, such as in savings and retirement accounts.

Thanks to compound interest, a dollar you save and invest today has more value than a dollar you invest 5 or 10 years from now. That is because your invested money will be earning interest on top of interest for a long time. For that reason, it makes more sense to start saving for retirement when you are younger rather than focus on paying off your mortgage.

What to do if you cannot pay off your mortgage before retirement?

Unfortunately, not everyone can pay off a mortgage. Retiring with mortgage debt is becoming a more common scenario.

person holding a house keys - benefits of paying off mortgage before retirement

To pay off a mortgage before retirement might not be realistic for everyone. If you are like me and worry about how to afford mortgage payments in retirement, there are several options to consider:

Downsizing. Your home is one of the biggest investments.

If you have been living there for a long time, your home went up in price and accumulated a lot of equity. One of the ways to get rid of mortgage payments and home maintenance bills is to sell the house.

If you cannot afford to pay off your mortgage, you might consider selling your home. You can sell the big house and trade it down for a smaller house or a condo. Or you can move to a cheaper area and pay cash for your new house.

Related Post: 5 Tips on How to Downsize for Retirement

Invest equity. Do you want to deal with the hassle of homeownership in retirement?

Maybe you rather spend time traveling and visiting family and friends. In this case, your option will be to sell your home, invest cash, and enjoy living on rent and mortgage-free.

Investing the cash from home sales will bring you additional income in retirement. If you let it grow for 10 years in your investment portfolio, and it might be enough to pay cash for your next house or a condo if you are tired of renting.

But many people would prefer to stay in their homes and retire in place. They want to remain in their neighborhood for life.

In this case, homeownership might provide several options to fund your retirement without the risk of stock market investments.

In this case, consider a reverse mortgage. Those people who have big equity built up in their homes could apply for a reverse mortgage. This type of loan can be also used to pay off the existing mortgage.

A reverse mortgage is also known as a home equity conversation mortgage (HECM). It provides income to retirees and does not require monthly payments. You still have to pay taxes and home insurance, and you will be responsible for maintenance.

The best part is that you will receive a portion of your home equity in cash without requiring you to move out. But the loan has to be repaid when the owner sells the house, moves out, or dies.

A reverse mortgage can be flexible, and you can take HECM as a line of credit (HELOC), lump sum, or annuity.

One option is to use HECM for your medical or long-term care expenses late in life when you run out of money.

Another option is to set up an annuity to increase Social Security and any other retirement income you will receive.

However, reverse mortgages can be complicated. There are many terms and conditions, and it is a relatively expensive way to borrow money. So, make sure to do your research to understand all the pros and cons, and talk to a loan specialist.

Your Guide to Reverse Mortgages

Should you pay off your mortgage before retirement if you could? Share your thoughts in the comments below.

If you enjoyed reading, share this post so that others can find it, too!

Filed Under: Money Management, Retirement Expenses, Retirement Planning Tagged With: benefits of paying off mortgage before retirement, how to pay off mortgage before retirement, mortgage in retirement, pay off mortgage before retirement, retirement expenses

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Hi, I'm Maggie. Welcome to Save, Invest & Retire! I am on a mission to help baby boomers learn how to save & invest smart. Follow me on detailed information about retirement planning, travels, and living the life of your dreams.

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