If you have plans to buy a home in the mountains for your retirement years, you might be tempted to take the plunge and buy your future home now while interest rates and home prices are low.
For 50- and 60-somethings with plenty of discretionary income, buying a home with cash is an option. Others need financing.
There are three basic options for financing a home.
The home can be financed as an owner-occupied home if the buyer lives in it as a primary residence, as a second home or as an investment.
“Second-home financing means that you will need to qualify to pay the mortgage on both your current home and your second home,” Cunningham says. “If you need some additional income to qualify for the loan, you can rent the property, and a lender will use some of your rental income for a loan approval.”
It is suggested that financing a property as a second home rather than as an investment property is the better option because interest rates, qualification guidelines and down payment requirements are generally more lenient on second homes than on investments. He says an investment loan always requires a down payment of at least 20% or 25%.
People getting ready to retire might want to consider the benefit of buying homes before they stop working because a mortgage approval could be more difficult to obtain without an income.
“Conventional loans are written off your income, and you have to prove you have the means to repay the loan,” Financers say. “You may not be able to do that based on dividends from your retirement savings. If you are concerned about qualifying for a mortgage after you retire, you could be better off applying for one earlier.”
They also say one of the primary benefits of buying a home before retiring can be the generation of rental income.
“Income from a rental property can act as a hedge against the low interest rate environment we are in and against future inflation because you can raise the rent to offset inflation when it hits,” Foss says. “If you turn the property into a rental property until you are ready to live in it, you also gain some tax advantages.”
If you can handle the expense and hassle of a rental property, this could be a good way to use the property before it becomes your primary retirement residence.
The pre-retirement buyers we work with are looking for bargain-priced luxury homes and land because they offer more certainty of future appreciation.
Some people are deciding to buy now and leave the property empty for a while or to use a place as an occasional vacation home. Others decide to rent the property until they are ready to use it. When choosing a home a few years before retirement, the first consideration should be the location.
The important thing is to look at this property like any other investment and evaluate the potential resale value based on the location, community amenities and floor plan.
“People change a lot between age 50 and 90, so I like the idea of keeping your options open and allowing for flexibility,” says Foss. “Buying your retirement home early can be a great option, but I recommend that people do this with the mindset that it is a rental property with the option of using it as a vacation home later rather than getting locked into a retirement plan.”