The kids are safely out on their own and retirement is at hand. If you're planning to sell your now oversized home for something smaller and easier to maintain, the first issue you'll need to tackle is how you'll finance the new house.
Take Our Quiz: How Smart of a Home Buyer Are You?
Most downsizers no longer need to worry about taxes. For couples filing jointly who have lived in their home for at least two of the five years leading up to the sale, $500,000 in profit is tax-free. Many downsizers who are flush with cash from the sale of their old home, choose to buy their new home outright, freeing themselves from monthly mortgage payments. Although this might sound attractive, it may not be your best option, especially if you consider the tax benefits.
Crunching the Numbers
Let's compare the Smiths and the Joneses. Both couples, comfortably in the 25% tax bracket, collected a cool $80,000 on the sale of their old homes and have their eyes on a tony little lake community with houses in the $200,000 range.
Sign up for Kiplinger’s Free E-Newsletters
Profit and prosper with the best of expert advice on investing, taxes, retirement, personal finance and more - straight to your e-mail.
Profit and prosper with the best of expert advice - straight to your e-mail.
Both couples took 15-year fixed-rate mortgages at 5% interest. (You may be able to get a 15-year mortgage for as little as 3%.)
The Smiths decided to put the full $80,000 down on the house, believing that they'd save more by having a lower monthly payment ($949 for principal, interest).
The Jones opted to put only 20% (or $40,000) down to avoid paying private mortgage insurance. They invested the other $40,000 in a balanced portfolio of stocks and bonds earning an average 6% annually. Their monthly payment is higher -- $1,265 for principal, interest -- but by the end of the loan term they actually have about $2,000 more than the Smiths because of higher tax deductions and earnings from their investments.
See Also Home Buyer's Survival Kit
If your investment returns are higher or the mortgage rate lower, the returns would be even greater. And that's not even counting the home's appreciation and the power of leverage (using borrowed money to generate a return).
In addition to a bigger bottom line, mortgagers like the Jones enjoy increased liquidity by not tying up cash in real estate, which could be hard to sell in an emergency.
Keep in mind, though, that qualifying for a mortgage as a retiree can be more difficult than qualifying during your working days. And your estate-planning goals may also influence how you decide to pay for your new home.
Before you make a commitment to pay cash or borrow, run your proposal by an estate lawyer to make sure it complements your overall plan and doesn't create problems for your heirs.
-
Visa Is the Worst Dow Stock Wednesday. Here's WhyVisa stock is down sharply Wednesday after the credit card company came up short of revenue expectations for its fiscal Q3.
-
Another Analyst Moves to the Sidelines on Tesla Stock After EarningsTesla stock is spiraling Wednesday after the EV maker's big earnings miss and Wall Street has been quick to weigh in. Here's what you need to know.
-
Commercial Real Estate Outlook 2024: The Kiplinger LetterThe Kiplinger Letter In 2024, expect hybrid and work-from-home trends, tighter budgets, rising rents and the demand for data centers to continue.
-
Delinquent CRE Loans Are on the Rise: The Kiplinger LetterThe Kiplinger Letter Banks are expanding their efforts to restructure CRE loans to avoid losses from the commercial real estate sector.
-
As Mortgage Rates Rise, Renting Is Now Cheaper Than Buying for Many: The Kiplinger Letter
The Kiplinger Letter A jump in mortgage rates has caused housing affordability to slump and priced many first-time home buyers out of the market.
-
Rental Market Will Slow Through 2023: The Kiplinger LetterThe Kiplinger Letter Expected growth in the rental market is likely to remain slow for the rest of the year amid a slow housing market and cooling economy.
-
Selling Your Home? Set the Right Pricereal estate If you're selling your home, setting the right price is crucial. Don't overprice or you'll scare away prospective buyers.
-
WFH Impact on Commercial Real Estate Market: Kiplinger Economic ForecastsEconomic Forecasts Commercial real estate continues to struggle. Office vacancies hit 18.9% in the second quarter of 2023.
-
Greenland, U.S. Plans to Boost Tourist Economy: Kiplinger Economic ForecastsEconomic Forecasts A U.S. congressional effort could see some Canadian visitors get longer stays, meanwhile, Greenland bids to be the next vacation hotspot.
-
China’s Economy Weakened by Low House Prices and Falling Exports: Kiplinger Economic ForecastsEconomic Forecasts China’s economy lost momentum in May due in part to fewer exports and declining housing prices, but the country’s fast fashion retailers are booming.
