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The pros and cons of financing a home in retirement

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By John Costigan

Some people opt to get home way after they retire. Doing so may be of an advantage or disadvantage. Merits include;

Paying interest to oneself

It mainly happens with 401k loans. Administrators give reasonable rates. Paying interest to oneself means that since 401k  assists in value lost by removing money from your 401k for a few years. The method is also classified as reverse paying o paying mortgage rates.

One can avoid paying PMI

Buying a home without a 20% down payment leads to costly PMIs. However, older couples may have money in their retirement savings account, which enables them to have the minimum down payment required. Thus, seniors must start saving early for their retirement home to avoid strains at old age.

A home is a good investment

Getting a home is an investment worth considering. A house situated in a hot market leads the buyer to make considerable profits in the later years. Also, people think leaving behind an inheritance for their children makes homeownership a good idea. It is also worthwhile considering that home appreciation value also depends on the real estate market of a given state.

Stability and control of a home

With a rental home, there are chances of rent increment, and the renter has no control over the issue. Also, one cannot remodel a house according to how one would want it unless one has permission from the landlord, but there are limits also. Buying a home thus allows one to pay fixed interest rates for the agreed-upon period. An individual also can move to other places without any necessary restriction from the landlord.

Builds home equity

Refinancing a home at retirement is good as it assists in building equity. Equity is necessary when one wants to either take a loan or have a reverse mortgage. Senior citizens with homes have several advantages when the house gains more value.

Homeownership also boosts an individual’s net worth compared to a renter’s.

Tax benefits

In some states, tax benefits are set aside for older citizens refinancing home ownership. It also includes mortgage points that reduce the overall cost of a home. However, a bill issued in 2017 reduced such benefits. They still exist, but it depends on the state one is situated.

Refinancing a home in old age, however, is accompanied by several hindrances such as;

Reducing earning potential of retirement account

It primarily occurs when an individual removes money to buy a home from retirement savings. More money in a retirement saving account leads to more money in the budget; thus, when senior citizens withdraw considerable amounts to buy a home, the account reduces its earning potential.

Difficult to catch up with retirement saving

It becomes challenging since most senior people use retirement savings, and getting back to where the account was before cashing out becomes a monumental task, especially if it was bought on a mortgage payment.

Risk

Paying for a mortgage at old age is also relatively cumbersome since most senior people have reduced income and small mistakes lead to huge debts which might even lead to one selling the home to pay huge accumulated debts.

Refinancing a home after retirement exposes not only a home but also assets and other additional investments. Risk exposure deteriorates an individual’s financial life and leads to a downward fluctuation of income on investment. Such scenarios are hardly manageable, and no person would want to be in such a situation. Not in old age.

Maintenance costs

Buying a home is followed by various maintenance costs to make the home more suitable for a buyer. There is a possibility that the buyer is also required to pay home ownership associations more so if the home buying is under one. Depending on the amount required every month, the cost may be expensive for especially older people.

A home is illiquid

In an emergency, it isn’t easy to sell the property immediately. When refinancing, much paperwork is involved, and many other processes delay the selling process. The time a  home takes in the market is a factor in addition to remodelling the house so that it is sold in good condition.

Property taxes

They are taxes paid for public services such as schools and firefighters. All costs are high, and the buyer may not afford them due to the reduced salary.

Other factors are that one may not live long enough to see the return on investment, whereas seeing a return is every investor’s dream. Various reasons lead to people buying retirement homes. An individual at times needs to downsize or even get a second home. A senior individual must be aware of the pros and cons involved to prevent surprises in later stages.

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