Moving Somewhere New When You Retire? Deciding on a Mortgage is a Big Deal

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Moving to a new location upon retirement is not uncommon, but deciding whether to take out a new mortgage to buy a home is a significant decision. Transitioning from a steady paycheck to a mix of fixed and variable income, along with a new lifestyle, complicates the picture, especially when adding substantial debt.

Mortgage rates currently hover around 7%, and home prices are rising, making this decision even more challenging. “Any time you take on debt, you increase risk in your situation,” says Jim Stork, a certified financial planner based in Illinois.

Who’s Taking on New Mortgages?

Data from the National Association of Realtors reveals that more than a third (35%) of homebuyers last year were between the ages of 59 and 98, with most of them financing their purchases. The decision to take out a new mortgage depends on various factors, including proving creditworthiness and managing the costs of maintaining a home.

Age Isn’t a Factor, But Income Is

While age discrimination in mortgage lending is illegal, lenders focus on your ability to repay your mortgage with non-paycheck income sources. “When you qualify for a mortgage, it’s all based on your income,” says Melissa Cohn, regional vice president at William Raveis Mortgage.

Lenders consider various income sources such as Social Security benefits, pensions, annuities, spousal benefits, disability payments, interest, dividends, and 401(k) or IRA distributions. If a portion of your income is tax-free, lenders may treat it as worth 25% more.

For example, Fannie Mae explains that if 15% of a $1,500 monthly Social Security benefit is tax-free, $225 of it will not be taxed. Adding 25% of that amount ($56) to the qualifying Social Security income results in $1,556 ($1,500 + $56).

Using Your Nest Egg

Different methods can be used to calculate the income your nest egg could provide. One method is asset depletion, dividing eligible assets by your loan term. For instance, a $700,000 IRA divided by 360 months (30-year mortgage) translates to $1,944 per month. “You don’t ever have to take the money out — but you can use your assets [to qualify for a mortgage] as if you were going to take the distribution,” says Cohn.

Alternatively, if you are at least 59-1/2, you can start taking monthly distributions from an IRA or 401(k) without penalty, and the lender will count this as income if you show you have sufficient funds for three years of distributions. This flexibility allows you to adjust distributions after closing, assuming you are not yet required to take minimum distributions by the IRS.

Assessing Debt and Income

Lenders will assess your debt-to-income ratio, which includes your expected mortgage payment and other debts like credit card, student loan, and car loan payments. For conventional loans, your DTI ratio can be up to 50%, and between 43% and 45% for jumbo loans.

Preparing for a Mortgage

Before seeking a mortgage, understand your expected monthly income and expenses in retirement. “Most (new retirees) see a decrease in income,” says certified financial planner Lori Trawinski, director of finance and employment at AARP. While some expenses decrease, others like medical costs, property taxes, home insurance, and utilities may increase.

Consider what will happen to your household income when one spouse dies, as this can significantly impact your comfort level in carrying a mortgage.

Renting First

If moving to a new state or region, consider renting first to gauge the cost of living and fit for your lifestyle. As Jim Stork notes, “Florida in August is not as fun as Florida in January.”

Balancing Debt and Investments

Avoid taking on more debt than necessary, as mortgage costs are fixed, but returns on investments, the housing market, and health needs are variable. Putting down at least 20% to avoid private mortgage insurance and being comfortable with home maintenance costs, which might be 2% of your home’s value annually, are also crucial considerations.

Comparing Interest Rates

Compare your mortgage interest rate to the return on your investments. With current rates around 7%, it’s a harder calculation, especially for conservative investors. If your CDs earn 4% and a mortgage costs 7%, you lose money daily on that decision, explains Stork.

In conclusion, moving somewhere new in retirement and deciding on a mortgage involves careful consideration of income, debt, and overall financial health. It’s essential to weigh all factors and perhaps consult with a financial advisor to make the best decision for your situation.

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Keeping a Low Rate With These Home Equity Loans

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Many current homeowners prioritize holding onto the ultra-low mortgage rates secured during the pandemic. With mortgage rates hovering around 3% at that time, homeowners are now hesitant to take out new loans at today’s rates, which average over 7% for a 30-year fixed mortgage. A 7% mortgage rate would result in significantly higher monthly costs and interest charges over the life of the loan, even if the borrowing amount remains similar.

However, mortgage rates aren’t the only factor that has surged in recent years. Home values have also soared, and the average homeowner with a mortgage now has nearly $300,000 in home equity, with about $206,000 of that being tappable. This equity provides homeowners with an affordable borrowing option for major expenses like home renovations, education costs, business investments, or debt consolidation.

It’s crucial to understand the implications if you want to keep your low mortgage rate while borrowing from your home equity. Some methods, like cash-out refinancing, require giving up that low mortgage rate. However, other options allow you to tap into your home’s equity without altering your existing loan.

Home Equity Borrowing Options to Keep Your Low Mortgage Rate

Homeowners have several ways to borrow against their home equity while retaining the low mortgage rate acquired during the pandemic:

Home Equity Line of Credit (HELOC)

A HELOC is a revolving line of credit secured by your home equity. You can borrow against this line as needed, up to the credit limit, with a typically variable interest rate. The flexibility of a HELOC is a major benefit, as you only pay interest on the amount you borrow rather than the entire credit line. While HELOC rates can fluctuate based on market conditions, they are currently lower than many other borrowing options, such as credit cards. The average HELOC rate is just over 9%, compared to over 21% for credit cards. This makes a HELOC a preferable option for most homeowners, as it allows them to keep their original mortgage rate.

Home Equity Loan

A home equity loan provides a lump-sum amount secured by your home equity, with a fixed interest rate repaid over a set term, usually ranging from five to 30 years. The fixed rates for home equity loans are advantageous as they remain consistent throughout the loan term. Since a home equity loan acts as a second mortgage, it doesn’t replace your current mortgage, allowing you to retain your low mortgage rate. Currently, home equity loan rates average 8.61%, making them more affordable than many other borrowing options.

Home Equity Sharing Agreement

For homeowners hesitant to take on new loans, a home equity sharing agreement is an alternative. This model, offered by specialized providers, involves selling a share of your home’s future appreciation in exchange for a lump-sum cash payment. While fees can be steep, this option helps avoid additional debt and doesn’t require changing your current mortgage rate. It can be worth considering under the right circumstances, but thorough research is necessary to understand the terms fully.

By exploring these home equity borrowing options, you can leverage the equity in your home while keeping your low mortgage rate secured during the pandemic. This can be particularly beneficial in today’s high-rate environment, where current mortgage rates are more than double those of pandemic-era rates. Before making any decisions, it’s essential to carefully consider the costs, risks, and long-term implications of each option to determine the best fit for your financial situation.

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Mortgage Rates Decline Amid Strong Employment and Inflation Data

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Mortgage rates have dropped for the second consecutive week, with the average 30-year fixed-rate mortgage falling nearly a quarter of a percentage point over the past two weeks. The 30-year fixed-rate mortgage averaged 6.74% for the week ending March 14, down from 6.88% the previous week, according to Freddie Mac. This marks a slight decrease from last year’s average of 6.60%.

However, homebuyers should not anticipate a significant drop in rates in the coming months. Despite the recent decline, mortgage rates are expected to remain high due to persistent inflation pressures. “Despite the recent dip, mortgage rates remain high as the market contends with the pressure of sticky inflation,” said Sam Khater, Freddie Mac’s chief economist.

Rates Remain High Amid Inflation Concerns

Over the last four months, mortgage rates have decreased from the peak of 7.79% observed last year. This has somewhat improved affordability for homebuyers who have been navigating one of the least affordable housing markets in decades. Nonetheless, robust inflation readings and unexpectedly strong job numbers in February indicate that the economy is hotter than analysts and economists would prefer.

Homebuyers continue to be highly sensitive to interest rate changes. The slight drop in rates last week led to a 7% increase in mortgage applications for the week ending March 8, as reported by the Mortgage Bankers Association.

The Federal Reserve’s Influence on Mortgage Rates

The Federal Reserve’s aggressive campaign to hike interest rates has significantly curbed inflation over the past two years. However, Fed Chair Jerome Powell has emphasized the need for more consistent evidence of improving inflation before considering rate cuts. Market expectations suggest that Fed rate cuts may not occur before summer, and possibly not until fall. This delay in rate cuts contributes to keeping mortgage rates elevated.

While the Federal Reserve does not directly set mortgage rates, its actions influence them. Mortgage rates tend to follow the yield on 10-year US Treasuries, which are impacted by expectations regarding Fed actions, actual Fed decisions, and investor reactions. Lisa Sturtevant, chief economist at Bright Multiple Listing Service, noted, “In the short-term, mortgage rates are probably not going to fall much further this month.”

Market Dynamics and Affordability Challenges

Some homebuyers are relieved to see rates lower than those from last fall when they approached 8%. “Any downward trend in rates later this spring will bring more buyers — and sellers — into the market,” Sturtevant said. Currently, mortgage rates are approximately one percentage point lower than their peak last year.

For instance, in October, with a median home price of $391,800 and an average mortgage rate of 7.79%, the typical monthly payment with a 20% down payment was $2,254. This week, a home priced similarly with a mortgage rate of 6.74% would result in a monthly payment of $2,031, saving the buyer around $220 per month. However, rising home prices might offset some of these savings.

Although more inventory is becoming available, typical for the peak spring homebuying season, affordability challenges persist. Some buyers might delay purchasing in hopes that mortgage rates will drop further. However, this strategy has its risks. Falling mortgage rates are not guaranteed, and home prices are expected to increase. “Spring buyers may see higher mortgage rates, but summer buyers are likely to see higher home prices,” said Jones.

In conclusion, while the recent drop in mortgage rates offers a slight reprieve for homebuyers, the overall economic environment and housing market dynamics suggest that rates will likely remain elevated, and prospective buyers should weigh their options carefully.

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Exploring Home Equity Loans: An Affordable Borrowing Option

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In today’s high-interest-rate environment, borrowing money can be quite expensive. The average rates on credit cards and personal loans are currently sitting in the double digits. However, there are still some relatively affordable borrowing options available, and one of the best right now is a home equity loan.

Homeowners are in a unique position as they currently hold high levels of home equity. With home prices having soared over the past few years, the average homeowner is sitting on nearly $300,000 in home equity. This substantial equity can be borrowed against at an average rate of less than 9%, making home equity loans an attractive option compared to many alternatives.

Many homeowners are now opting for home equity loans as their preferred borrowing method. For the right person in the right circumstances, a home equity loan can make a lot of sense as an affordable way to access funds. However, it’s essential to understand when a home equity loan is a good choice and when it might not be the best option.

The Benefits of Home Equity Loans

Home equity loans are appealing because they offer a fixed interest rate for the life of the loan, unlike home equity lines of credit (HELOCs), which have variable rates that can fluctuate over time. This fixed-rate structure provides borrowers with a clear understanding of their costs and payment schedule from the outset, offering much-needed predictability.

Qualified borrowers can access substantial amounts of money at relatively low-interest rates compared to other loan types. Many lenders allow borrowing up to 85% of your home’s equity value, making it possible to secure large sums for major expenses, provided you meet the borrowing qualifications.

One of the most effective uses of home equity loans is to consolidate and pay off high-interest debts such as credit cards, personal loans, and student loans. By consolidating multiple high-interest obligations into a single, lower-interest home equity loan payment, you can reduce your overall interest costs and potentially become debt-free years sooner.

Important Considerations Before Taking a Home Equity Loan

Since home equity loans require putting up your home as collateral, it’s crucial to ensure you have a reliable and sufficient income stream to keep up with the additional monthly obligation. Lenders will closely examine your income, debts, and creditworthiness during the underwriting process, which helps determine whether you can afford the loan. Additionally, you should honestly assess your ability to handle the new loan payments on top of your existing bills and living costs.

While a home equity loan can help you consolidate debt at a lower rate, it won’t resolve long-standing debt issues or a spending problem. If your debt issues are caused by overspending, using a lump-sum loan to pay off debts will only reset the clock until those balances potentially accumulate again. Addressing the root causes of overspending is essential to avoid making your financial situation worse.

Home equity loans should ideally be used to finance major one-time needs, purchases, and investments that will pay off or increase in value over time. They are not suitable for funding discretionary, recurring expenses such as luxury vacations or frequent shopping sprees, which will deplete the funds without any lasting return.

Timing and Financial Strategy

Since home equity loans typically have a term of five to ten years with full repayment due by the end date, it’s important to consider your expected ownership timeline. If you plan on selling your home in the near future, you may not have enough time to fully benefit and recoup the costs of taking out the loan.

Additionally, if there are signs that interest rates may decline over the next six to twelve months, taking out a fixed-rate home equity loan now could lock you into a higher rate than if you waited. In such a scenario, a HELOC, which has variable rates that fluctuate with the wider rate environment, might be a better option. HELOCs provide a revolving credit line to draw from as needed and can help you save on borrowing costs if rates drop in the future.

Before tapping into your home’s equity with a home equity loan, carefully assess your short- and long-term financial situation to determine if it’s truly advantageous for your needs. When used responsibly, home equity loans can be a powerful financial tool. However, they require prudent planning and monitoring to avoid putting your home’s equity at unnecessary risk.

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Make the Most of Your Home Equity

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If you’re contemplating selling your house, understanding your home equity could be the key to making your decision easier. While affordability is improving this year, it remains tight, and that may be on your mind. But tapping into your home equity can provide significant benefits. An article from Bankrate explains:

“Home equity is the difference between your home’s value and the amount you still owe on your mortgage. It represents the paid-off portion of your home.

You’ll start with a certain level of equity when you make your down payment to buy the home, then continue to build equity as you pay down your mortgage. You’ll also build equity over time as your home’s value increases.”

Think of equity as a simple math equation: the current value of your home minus what you owe on your mortgage. Recently, your equity has probably grown more than you realize.

In recent years, home prices have skyrocketed, which means your home’s value—and your equity—likely increased significantly. You may have more equity than you realize.

How to Make the Most of Your Home Equity Right Now

If you’re thinking about moving, the equity you have in your home could be a big help. According to CoreLogic:

“. . . the average U.S. homeowner with a mortgage still has more than $300,000 in equity . . .”

Clearly, homeowners have a lot of equity right now. The latest data from the Census and ATTOM shows over two-thirds of homeowners have either completely paid off their mortgages or have at least 50% equity.

After selling your house, you can use your equity to help buy your next home. Here’s how:

Be an all-cash buyer: If you’ve lived in your current home for a long time, you might have enough equity to buy your next home without needing a loan. If that’s the case, you won’t need to borrow any money or worry about mortgage rates. Investopedia states:

“You may want to pay cash for your home if you’re shopping in a competitive housing market, or if you’d like to save money on mortgage interest. It could help you close a deal and beat out other buyers.”

Make a larger down payment: Your equity could also be used toward your next down payment. It might even be enough to let you put down a larger amount, so you won’t have to borrow as much money. The Mortgage Reports explains:

“Borrowers who put down more money typically receive better interest rates from lenders. This is because a larger down payment lowers the lender’s risk since the borrower has more equity in the home from the beginning.”

The Easy Way to Find Out How Much Equity You Have

To find out how much equity you have in your home, ask a real estate agent you trust for a Professional Equity Assessment Report (PEAR).

Planning a Move?

Your home equity can really help you out. Connect with a local real estate agent to see how much equity you have and how it can assist with your next home purchase.

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