Q: Is it safe to shop for senior housing or to refinance a mortgage for overdue renovations of an older home, or should we focus of paying off the mortgage of an existing home? I’m still working and I’ll turn 62 this year.
A: Mortgage rates and home costs have been at historic lows in 2012, but buying or selling a home is complicated for anyone—and seniors have special issues. Depending on your financial situation and needs, here are some points to consider:
Pay off an existing mortgage. When you make additional principal payments on an outstanding mortgage balance, the lower balance will save you interest expense. If you have an amortized fixed-rate mortgage, the monthly amount of the payment doesn’t change. With the additional principal payments the loan balance declines and more of your monthly payment goes toward the repayment of principal. You will repay the loan faster than the stated loan term on your contract. You can find mortgage calculators online, at www. Bankrate.com, to help you determine how extra principal payments reduce your mortgage interest expense and the remaining loan term. When considering pre-paying your mortgage, consider the rates of return. If you were to save the extra cash in a savings account or CD, your rate of return currently is quite low and prepaying your mortgage may give you a better return based on the interest rate of your loan. Financial advisors, however, generally recommend that you pay off your mortgage out of income, and not cash from your retirement accounts. Your retirement accounts provide you with a savings cushion, that most seniors will need later in retirement, and they are protected from creditors.
Refinance and renovate. If you find your current mortgage payment is too high, refinancing to get either a lower monthly payment or to take cash out may be an option. Before you refinance, have a long–term repayment plan, a budget, and you may want to discuss your needs with an independent financial advisor. If you are refinancing to renovate an older home, think long and hard about how much longer you plan to stay in your home, and how well your current housing will serve you as your health changes. Get bids from contractors, and be sure to include costs for new appliances, carpets, and fixtures. Will you have sufficient income and savings to cover a mortgage payment and still have money for repairs and maintenance ten or twenty years from now? Can you recover your renovation investment if you have to move and sell sooner than you planned? Take time to shop and carefully compare terms on loans—don’t be hurried into making a decision. Loan officers always push you to “lock in a rate.” Always ask for a “good faith” estimate and an estimate of the closing costs.
Sell and buy “senior” housing. If your home is too big, too expensive, and your needs are changing, it may be wise to start shopping for a more efficient newer home. Use the balance of the remaining sales proceeds for investments or an annuity to provide retirement income. When looking at new homes, consider future transportation needs and ease of access to public transportation to stores, businesses, healthcare facilities, and other favorite places. Spend time learning about the new community and do your homework on property values. Have homes in the area recently been reassessed for local taxes, or will you pay taxes based on “pre- crash” real estate values? How far is the new home from your kids and family? If you develop health issues, what type of medical care is available, including home care workers?
Adding a mortgage once you’ve retired adds a big monthly expense and it’s a decision that you may want to discuss with an independent financial advisor.