Gingerbread Houses on Martha’s Vineyard
As single Baby Boomers age, we need to decide how to handle many issues and housing is a major financial decision for us all. This blog will focus on home ownership with subsequent ones discussing renting and various types of homes from tiny homes to RVs. On the topic of owning, we’ll be talking about traditional homes with all of the rewards and challenges that come with buying and maintaining a residence.
If you decide to keep the house you own for your lifetime, you may have or be able to pay off the mortgage and just have to pay taxes, insurance, maintenance and for any upgrades. If you raised a family in that home, you have a home to accommodate your children and grandchildren when they visit, if they visit. You could also rent a part of it out for extra income or for use as a home office.
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However, if your home is too big for you to afford or maintain after you retire, you may want to downsize. Then you need to go through the emotional selling and buying process and not move from your next home for at least 3 years if you plan to get some equity out of it.
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Before you decide if you want to own another home you should look at the rent vs. buy ratio. One formula used by the real estate website Trulia is the “rent vs. buy rule of 15,” which says to multiply the annual rent of a comparable property by 15. If rent is $1,000 a month, it’s $12,000 annually. Multiple that number by 15 and you’ve got a suitable purchase price of $180,000. If you can find a home in that price range, then it’s more favorable to buy than to rent, but remember you have to consider other factors such as taxes, home owner’s insurance, maintenance, utilities covered in your rent payment and closing costs.
Photo credit: Kordite via Visualhunt / CC BY-NC
According to Greg Daugherty, a writer for Next Avenue, at http://www.nextavenue.org/should-you-rent-or-buy-home-retirement/, a recent study by Trulia concluded buying would be less expensive than renting in all of the top 100 U.S. metropolitan markets using a fixed, 30-year, 3.5% mortgage if you stay in the home for at least seven years (The average mortgage rate has risen since the study came out, to 3.75%.).
Go to http://us.spindices.com/indices/real-estate/sp-corelogic-case-shiller-20-city-composite-home-price-nsa-index for an interactive chart.
Many of you have bought a home alone or with a partner, but maybe it’s been awhile, so here’s a review of the things to consider when you buy. Some are out-of-pocket costs after your purchase offer is accepted and others are paid at closing.
- Earnest Money-This shows the seller you’re serious about buying the property. It generally ranges from 1% to 3% of the home’s purchase price. After accepting the offer, the earnest money is deposited into an escrow account and credited against your closing costs.
- Down Payment-This is a percentage of the home’s purchase price that you pay upfront, typically at closing. The down payment amount varies based on your credit profile, local market conditions and the type of mortgage loan. It ranges from 3.5% (chiefly for FHA loans) and could be more than 20% of the purchase price.
- Home Appraisal-Lenders require a home appraisal prior to approving the loan to ensure the offer price and the actual value match. An appraisal costs around $300 to $500 and is paid during or before the appraisal.
- Home Inspection-In order to find potential problems and defects that might not be apparent to an inexperienced buyer, a trained, licensed home inspector should be employed. The cost is paid at the inspection and is often about the same as appraisal costs.
- Property Taxes-You may need to compensate the seller for any property taxes they paid in the period between the closing date and the end of the current tax period. This expense, if there is one, varies based on your local tax rate and the closing date.
- First Year’s Homeowners Insurance-Lenders require proof of homeowners insurance prior to closing. Insurance costs vary based on the value, style, location and contents of the home, as well as your credit score, policy deductible and coverage limits.
- Other Closing Costs-Additional closing costs include loan origination charges, a credit report fee, a flood certification fee, lender’s and owner’s title insurance, recording taxes, state and local transfer taxes, first month’s mortgage interest and closing fee. As a rule of thumb, you can expect your total closing costs to range from 2% to 4% of the purchase price with the ratio falling as the purchase price increases.
- Private Mortgage Insurance-PMI protects your lender from financial loss if your home is foreclosed upon and sold at a discount relative to your purchase price. Private mortgage companies charge this if your down payment is less than 20% of the purchase price. If this is charged, your monthly escrow payment includes a PMI premium payment that can generally be canceled once the loan to value ratio (LTV) reaches 80% unless you’re a high credit risk. The payment amount depends on your loan’s balance and PMI rate.
Information is taken from Brian Martucci’s article “Renting vs. Buying a House – How to Make a Decision, Pros & Cons” at http://www.moneycrashers.com/rent-or-buy-a-house/.
Leslie Pepper, a freelance writer, wrote in the AARP Bulletin about the factors you need to consider if you currently own or are thinking about buying a home in the article “Rent or Own — What’s Best for Empty Nesters?” at http://www.aarp.org/money/budgeting-saving/info-12-2010/rent_or_own_whats_best_for_empty_nesters.html.
Here are some items she suggests you think about with a few that a single Baby Boomer may want to take into consideration.
- Liquidity is crucial in retirement. If you need your money fast for any reason, investments are easier to liquidate than real estate.
- Consider all of the costs. When you factor in the cost of mortgage interest, taxes, insurance, maintenance, repairs and updates will you come out ahead?
- Do you need the mortgage interest deduction? Talk to your tax advisor about your tax bracket and whether or not you’ll be coming out ahead if you buy. Your mortgage company’s statement shows how much of your mortgage payment is interest vs. principal. If your current mortgage will be paid off in 10 years or less, most of your payment isn’t going to interest, so that’s not much of a tax advantage to stay in your current home.
- What are your plans for the future? You’re single and the decision is all yours. If you want to stay in your hometown, then you may want to stay in your home or buy a smaller home. If you want to relocate and plan to stay there for a long period of time, then homeownership may be the best choice. Just remember the additional costs of owning we discussed earlier and that you can’t pick up and move to the mountains or the beach as easily. It’s a difficult decision.
- Are you happy taking care of your own indoor and outdoor maintenance? Some people enjoy decorating their home to their taste and having a garden space to call their own. Remember, condos and some communities do have restrictions on what you can do on the interior and exterior. On the flip side, you may own a townhouse or condo or live in a retirement community with a maintenance fee that covers amenities and outdoor chores, so you can own and not need to do yard work and keep up the community pool and workout room.
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- Do you have or want to have pets? If you own, you can have most animals unless you want livestock, then zoning laws or an HOA may have some objections. For single Baby Boomers, pets are family and they need to be considered.
Yes, this is a lot to consider at a time in your life when you thought you’d have everything under control. Don’t Worry. Be happy! You’ve worked all your life for this and it may be the first time you’re able to make this decision without having to think about others. Embrace the chance to make life altering change or stay in your comfortable community with old friends.
Next time we’ll discuss renting and why it may or may not be for you. Any comments you have about owning or renting are appreciated.
Continue the adventure!