Rent or Buy? Tips for Retired House-Hunters
Some retirees may find that renting a home is more cost effective than a mortgage.
By ANYA MARTIN
May 18, 2016
Conventional wisdom favors buying a home over renting, but some retirees may find that renting a home is more cost effective than a mortgage.
It is true that purchasing a home is 34.8% cheaper than renting nationally for households with a 30-year fixed-rate mortgage who move every seven years and can afford a 20% down payment, according to a study based on March home values and rents by home-listing website Trulia.com. However, much of those savings comes from the accumulation of equity through long-term homeownership, says Ralph McLaughlin, Trulia’s chief economist. If retirees plan shorter stays, or have no heirs to which to pass that equity, they may actually come out ahead financially by renting, he adds.
Equity calculation. Most retirees stay in their home for about 15 years, which is plenty of time to accumulate equity, Mr. McLaughlin says. However, if there are no heirs, or if the heirs are well off and don’t need an inheritance, the home is an illiquid asset that ties up money that could be used in other ways while a retiree is healthy and can enjoy it.
“Extra cash has other values, such as other investments or being used for personal things like recreation or vacation,” Mr. McLaughlin says. Equity benefits may also be at risk if a retiree has to sell the home quickly when market conditions may have depressed home prices, he adds.
Location does matter. In all 100 of the country’s largest metro areas, buying was cheaper than renting. But the savings varied, from 52.3% in New Orleans to just 14.4% in Honolulu, according to the Trulia study. For those who want to buy, the least-expensive retirement locations for buying were in Florida, including the Villages, Naples, Venice, Delray Beach and Deerfield Beach.
Plus at the moment, home prices are rising at a faster pace than monthly rents, even in expensive rental locations such as San Francisco, Mr. McLaughlin notes.
Flexibility to move. For retirees who want to sell their homes but don’t know where they’ll eventually settle, renting is a good way to test drive a new city, says Peter Grabel, managing director of Stamford, Conn.-based Luxury Mortgage.
Don’t forget other costs. What some retirees forget is that homeownership is more than a mortgage payment, says Matthew Carbray, managing partner of Avon, Conn.-based Ridgeline Financial Partners. Other potentially pricey expenses include property taxes and condo-association fees. Don’t overlook repair and maintenance costs-especially for things like a new roof or air-conditioning unit, which would generally fall upon a landlord in a rental situation, he adds.
Mr. Carbray says he recently helped a couple who is about to retire calculate that it was cheaper to move to Florida and rent than to maintain their Windsor, Conn., home, currently valued at $600,000, even when factoring in annual estimated travel expenses of $12,000 to fly back regularly to visit grandchildren. They had nearly $250,000 and 15 years left on a $350,000 mortgage and were paying more than $12,000 a year in property taxes, he adds. Their rent in Naples, Fla., is just $1,800 a month for a 1,500-square-foot home, Mr. Carbray says.
For soon-to-be retirees still in the ‘buy’ camp, here are a few considerations for qualifying for a jumbo mortgage:
* Applying with assets. Lenders base underwriting decisions on income and typically cap their highest allowed debt-to-income ratio for jumbo loans at 43%-qualifications that even wealthy retirees on fixed incomes may have difficulty meeting. Retirees should keep in mind, however, that assets can be counted as income, but to protect against market volatility, lenders typically only consider stocks at 60% of their current value, says Mathew Carson, a broker at San Francisco, Calif.-based First Capital Group.
* Put more down. Affluent retirees typically have more money saved, enabling them to make a higher down payment to get a lower interest rate, Mr. Grabel says. Another strategy is to get an adjustable-rate mortgage on the second home and then pay it off with the proceeds from selling the primary home when the time comes to move, he adds.
* Get preapproved. Because getting approved for a large mortgage can be challenging in retirement, going the extra step of submitting full income and asset documentation to a lender before home-hunting tells you how much you can afford, Mr. Carson says.
Source: Realty Times