Deciding whether to take out a new mortgage to buy a home in retirement is a big decision as it adds a large debt to the financial picture that is already transitioning from a steady paycheck to a mix of fixed and variable income. Mortgage rates are currently around 7% and home prices continue to rise, increasing the risk in the situation. Data shows that more than a third of homebuyers between the ages of 59 and 98 financed their purchases last year, signaling a growing trend of older individuals taking on mortgages.
When applying for a mortgage in retirement, lenders will focus on your ability to repay the mortgage with various sources of non-paycheck income rather than your age. These income sources may include Social Security benefits, pension or annuity income, disability payments, interest and dividends, and retirement accounts like 401(k) or IRA. There are also calculations that can be used, such as using the asset depletion method or starting monthly distributions from retirement accounts.
Debt-to-income ratio is another important factor that lenders will assess when considering a mortgage application. This ratio includes expected mortgage payments along with any existing debt like credit card, student loan, or car loan payments. A higher credit score will also help secure a better interest rate on the mortgage. It is essential to have a good understanding of expected monthly income and expenses in retirement before seeking a mortgage, as expenses may increase over time, particularly as medical costs rise.
Considering potential changes in household income, especially in the event of the death of a spouse, is crucial when deciding on taking out a mortgage. Renting in a new location before buying a home can help assess whether the cost of living and lifestyle in the area are suitable. Taking on unnecessary debt in retirement should be avoided, considering the variable nature of investment returns, housing market, and health needs. It is important to have a substantial down payment to avoid private mortgage insurance and consider the ongoing cost of home maintenance.
The decision to get a mortgage in retirement becomes more complex with current interest rates around 7% and potential lower returns on investments. It is crucial to compare mortgage expenses with investment returns on an after-tax basis to make a well-informed financial decision. Paying attention to ongoing costs like maintenance and ensuring the financial ability to keep up with payments is essential in preserving the value of the property. Overall, retirees should carefully evaluate their financial situation and comfort level before taking on a new mortgage in retirement.
