How To Finance Your Retirement Home
Even if you have the necessary cash to buy a property outright, financing your retirement home can make perfect sense, according to Business Week.
In spite of the recent softening of the Florida housing market, plenty of senior citizens are still getting so much for their homes that paying cash for a retirement property is not an issue. But what do you do if you aren’t ready to give up your primary residence, but want the new home just the same?
Do you finance the new place, and if so, how? Is paying cash not always the best way for you to go? Consider the many Florida home loan options below and think it through. You have approaches than you think.
CONVENTIONAL FLORIDA HOME LOANS
Many people don’t take on another Florida home loan at this point in their life because they desire a debt free retirement. The flip side, however, is that you lose the mortgage interest tax deduction, which reduces your tax burden dramatically and can be helpful for higher-income retirees.
Some Florida home loans, in turn, will free up cash for other investments, allowing you to diversify your holdings and lower your overall financial risk. If you do elect to take on a mortgage at this stage, be wary of low-rate adjustable products, and look to lock in costs with a fixed-rate loan. An exception could be made if you need short-term financing, of course.
A FLORIDA HOME EQUITY LOAN
The options include refinancing with a conventional loan and withdrawing some cash for a down payment, taking a Florida home equity loan, or the similar home equity line of credit. Bankrate.com data indicates that the interest is lowest on the conventional mortgage, then the line of credit, with the Florida home equity loan bringing up the rear. Home equity loan rates are fixed, while refinancing options can be variable or fixed, and lines of credit are variable — which could become costly if rates continue to rise.
REVERSE MORTGAGES
If you are at least 62, and you own your home outright or have built up substantial equity, you may be able to qualify for a reverse mortgage. This allows seniors to convert your home equity into a lump sum or an income stream. Most people get a reverse mortgage so that they can remain in the same home. Be advised that any reverse mortgage will carry closing costs, and that you will have to pay the loan in full when you leave that residence. Be sure to crunch all the numbers before going this route, and don’t be tempted by the quick fix potential.
YOUR SOCIAL SECURITY
Financial adviser Paul Jeffery suggested to one of his clients that he dedicate his $2,200 monthly Social Security payment toward the purchase of the $850,000 retirement home he’s building. In doing so, the client will take out a Florida home loan with monthly payments just about equal to the Social Security check, which nets him a $362,000 mortgage at the current rate of 6.12 percent. He will then use money from the sale of his current home to make up the difference. The rationale for this strategy is Social Security being a reliable stream of income that you know you’ll get and when. You can treat a pension or annuity the same way.
TAPPING THOSE RETIREMENT ACCOUNTS
It’s generally not smart to take money out of a 401(k) or IRA, as you’ll owe regular income tax on the withdrawal and lose the future value of the growth in your savings. You owe an additional 10 percent early withdrawal penalty if you are at not 59 1/2 years old. High-income taxpayers could find this an especially painful hit to absorb.
There are other (and better) ways to access these funds, one being to use the IRS “72(t)” provision. This allows for penalty-free early withdrawals of “substantially equal periodic payments” that spread your 401(k) savings over your life expectancy. Be aware that by doing this you commit to taking payments over a five-year period, or until you turn 59 1/2, whichever comes later, and that a penalty will ensue if you don’t.
Another way to tap this cash is a 401(k) loan. Kathleen Ahern, a 51-year-old title insurance executive in Simi Valley, Calif., borrowed $50,000 at 6 percent from her 401(k) to cover most of the down payment on a home in California’s Lake Arrowhead. The majority of 401(k) plans allow loans, but the size will be capped at 50 percent of vested funds, up to $50,000.
NO MORE LIFE INSURANCE
If you have an unnecessary life insurance policy hanging around, you might be smart to cash in. A policy you purchased many years ago to protect the loss of future earnings may no longer be applicable, and you could use the proceeds for a piece of Florida real estate. Consult your financial adviser before doing this, of course.
THE PROPERTY EXCHANGE
If you own a Florida investment property, you might use a “1031 exchange” to trade it for a similar property that will become your future retirement home. The advantage of the 1031 exchange is to defer capital-gains taxes on the investment property you give up, but you must follow the IRS’ rules and establish that your intention (originally) was to use the new property for investment, not as your residence. That’s why having a tenant with a lease is a good idea.
