Retired Seniors' Guide to Downsizing

retired-seniors-guide-to-downsizing.jpg

When it comes time to consider downsizing your home, there are a mix of emotions and stressers you may have never encountered before. For seniors, it’s a situation that sometimes comes about out of necessity and sometimes simply as a way of improving the quality of retirement years.

As the number of Baby Boomers entering retirement continues to climb in the US, the reasons to start downsizing are more apparent than ever:

  1. Economic necessity. It’s common for many older adults to be faced with unexpected medical expenses, growing homeowners insurance rates, and rising utility costs. Selling the house and moving into a more affordable space is often the solution.
  2. Health concerns. Many seniors downsize to a home where at-home care is more convenient and there are fewer everyday obstacles to maintaining good health.
  3. Convenience. If you’re tired of doing all the housework that comes with a larger home, you’re not alone. A lot of retirees opt for smaller homes where upkeep is less of a responsibility.

In terms of the cost benefits, retired seniors stand to save significantly when moving to a smaller space. Consider that for the typical single-family home, heating and cooling accounts for 42% of the energy bill, according to the U.S. Department of Energy. When the square footage of your home shrinks, so does that energy bill.

Moving to a smaller home could also help you save on:

  • Mortgage payments
  • Property taxes
  • Maintenance (lawn, pest control, snow removal)

If you’re preparing for retirement or have already retired and you’re now considering downsizing, know that you’re in good company. A poll by the Demand Institute concludes that 37% of Baby Boomers plan to move later in life. Of those planning to move again after retirement, 47% said they’d like to downsize. Since there are roughly 75 million Baby Boomers in the US, we can expect roughly 10 million retirees to downsize in the coming decades.

Read on for helpful tips and guidance as you think about what matters most for your retirement, including the home you envision yourself in.

Budgeting for a downsize

Choosing to downsize to a smaller home in retirement isn’t always motivated by economics, but it is always affected by it. Even for retirees belonging to a high tax bracket, downsizing is a consideration for practical reasons:

Retired-Seniors-Downsizing.png

No matter why you’re considering a new home, putting together a well-thought out budget you can stick to is a wise first step. We can break your budgeting plan down into several key points you should account for:

What are you paying now? What will you pay in a downsized home?

Make a list of all the expenses associated with your current home. This should include: mortgage payments, utility bills, maintenance costs, HOA fees, and everything else you pay on a monthly basis. You’ll be able to calculate these same expenses for your new, smaller home (or at least come up with a realistic estimate).

To figure out the monthly mortgage payment for your new home, simply note its list price and plug it into Bankrate’s mortgage calculator. You’ll be able to change the mortgage term, down payment amount, and mortgage rate—giving you a very clear idea of what your mortgage payment will be at the new home you’re considering.

After coming up with your “new” mortgage payment, you should also be able to determine a rough estimate for utility costs. If you’re thinking about moving out of state, take a look at the U.S. Energy Information Administration’s recent numbers for average monthly bills for single family homes by state. If you’re downsizing but also moving to a state where energy costs are on average higher, the savings may not be as great as you’d hoped. However, differences in energy costs can also work in your favor.

Let’s say you currently live in Connecticut, where energy bills are among the highest in the nation at around $142 per month. If you move to Florida, where monthly energy bills are $123 on average, you’ll save a couple hundred dollars a year on energy alone.

Find out if your target home has an HOA, and also take into account things like lawn services. Add these expenses up and the overall cost benefits of downsizing will become clear.

What’s your current income?

Preparing for a move is a great reason to reassess your financial big picture. Everyone’s financial outlook is unique, so taking the time to piece together all sources of income you have, as well as savings accounts and more, will help you develop a game plan.

Critical questions to ask yourself:

  • If you’re not yet retired, how realistic is your goal retirement date?
  • What alternative sources of income do you have?
  • Will you be applying for Social Security? If so, when? (Note: the age at which you are eligible for Social Security is between 66-67, depending on the year you were born.)

Answer these questions to determine what your monthly income is, how much you have in savings, and what a comfortable mortgage payment will be for your next home.

What will it cost to sell your home and buy another?

Most retirees have been through the home-selling process before, but many haven’t in years, maybe decades. Take into account the extra fees and expenses that come into play when selling a home:

  • Realtor’s commission. The fee you’ll have to pay your realtor is typically 5-6% of the sale cost.
  • Closing costs. Depending on the real estate market you live in, you may be asked to take care of closing costs, which include property taxes, attorney fees, and other miscellaneous fees.
  • Inspections and home repairs. Buyers want thorough home inspections before signing on the dotted line; if any structural, electrical, or plumbing issues come up, you may have to cover those expenses.
  • Mortgage payoff. If your loan has a penalty for paying off the mortgage early, you’ll have an extra expense you may not have already accounted for. The sum you make from selling the home will mostly go into paying off the current mortgage.

The responsibility of some of these costs can shift from homeowner to homebuyer, so knowing exactly where you stand with these fees is a critical component to your downsizing budget.

Although there are many reasons for downsizing, budgeting carefully to make your new home less expensive than your current home is a huge benefit. It’s easy to lose track of all the small expenses that come with a move, but with a little diligence, you can save big in the long run.

What’s the plan?

Once your budget is in order, you’ll have to get the wheels turning on a strategy. There are a lot of moving parts in play, so breaking down your plan into simpler terms is a good place to start:

Selling your home and assets

Will you use a realtor or opt to sell the home yourself?

Keep in mind that selling the home yourself will entail a whole new list of responsibilities and tasks that may delay your moving process beyond your original timeline.

Will you be selling a car?

If you don’t do much driving, don’t want the responsibility, do want the money, or have a health concern keeping you from driving, selling a car is a wise decision. Many retired couples who have two cars and will sell at least one when downsizing as a way to collect some cash and free up space.

What other assets do you have?

A bittersweet, yet rewarding, part of downsizing is getting rid of stuff you no longer need. Whether that means valuables you no longer need or junk taking up space in your garage, let it go! You’ll be surprised at how freeing it is to clear out the basement and get paid for the stuff you haven’t used in ages.

Finding a place to live

Would you prefer to stay in the same area or are you excited about moving to a new place? If you’re moving somewhere new, take into consideration all the amenities you’ll need now and later on. Check for proximity to hospitals, grocery stores, and other essentials. Downsizing should make life easier—if you have to travel 45 mins to weekly doctor appointments, think about how that will affect your quality of life.

Considering all housing options

Single-family home — With a smaller single-family home, you can expect a similar lifestyle to the one you live now, but with fewer responsibilities and less clutter.

Condo/Townhome — Condos and townhomes are excellent options for retired seniors who value their freedom and self-sufficiency and also want to get off the hook for property maintenance. Don’t forget to take a look at HOA fees.

Assisted living community — Assisted living communities provide housing, meal prep, and health-related services for seniors. Many include luxurious amenities and a more thorough level personal care. Assisted living is an option for seniors with health concerns.

Move in with your adult children — If you’ll be living with family, any financial burdens you had in your own home will be eased. Being close to children and grandchildren is another benefit of moving in with family. Not enough room at their home? Do some research on “Granny Pods,” the latest trend in senior living. Granny Pods are essentially tiny homes that can be built in the backyard of your adult child’s home. Seniors who want to live with their kids can buy a Granny Pod and be close to home without feeling like a burden.

Finding a new mortgage

Downsizing to a new home in your retirement years puts you in a unique position when it comes to finding a mortgage.

After selling your old home and extra assets, you’ll be in a position to apply for a decent short-term mortgage with manageable monthly payments. Be sure to check mortgage rates often and track trends in your new area to secure the best loan you can. You’ll most likely be interested in one of the following:

  • 10-year mortgage. The shortest-term mortgage and usually the one with the lowest rates, ten-year mortgages are great options for those who want to quickly accrue equity in their home and pay less interest than they would with a longer mortgage. Monthly payments will be higher than with other term-lengths, but if it is still lower than the payment you have at your current home, it’s worth it.
  • 15-year mortgage. Fifteen-year terms will also carry lower mortgage rates and APRs than longer term mortgages, though obviously not as low as with a ten-year term. If you want to get the house paid off as quickly as possible but you aren’t comfortable with the monthly payment associated with a ten-year mortgage, consider a fifteen-year term instead. You’ll have a little more leeway in monthly spending while still paying off the home relatively quickly.
  • Reverse mortgage. If you want to tap into your current home’s equity before moving out, consider a reverse mortgage. Your bank will submit payments to you based on a percentage of the equity you have in your home and you won’t need to immediately pay it back. Loans don’t need to be paid back until the homeowner sells the home or dies, making reverse mortgages an intriguing retirement tool for seniors who are thinking about downsizing to a new home.

No matter the reason you have for considering downsizing, you are wise to contemplate its advantages. Not only do you have the opportunity to start anew, perhaps in closer proximity to family, but you can drastically improve your quality of life in retirement. By downsizing to a smaller home, you are freed from the upkeep responsibilities of owning a large home. You’ll potentially save big on standard costs associated with homeownership and most importantly of all, you can finally take time to relax.

4 Stats That PROVE This Is NOT 2005 All Over Again

Recent research by realtor.com examined certain red flags that caused the housing crisis in 2005, and then compared them to today’s real estate market. Today, we want to concentrate on four of those red flags.

  1. Price to Rent Ratio
  2. Price to Income Ratio
  3. Mortgage Transactions
  4. House Flipping

All four categories were outside historical norms in 2005. Home prices were way above normal ratios when compared to both rents and incomes at the time.

They explained that mortgage transactions as a percentage of all home sales were also at a higher percentage:

“Loose credit was one of the main culprits of the housing crisis. Mortgage lending expanded dramatically as unhealthy housing speculation reached its peak and was met by the highest level of credit availability as measured by the Mortgage Bankers Association. The index measures the overall mortgage credit condition by the share of home sales financed by mortgages. This metric does not capture credit quality, but it does set a view of the importance of financing in supporting the housing market.”

House flipping was rampant in 2005. As realtor.com's research points out:

“Heightened flipping activity is a clear indication of speculation in the real estate market. A property is considered as a speculative flip if the property is sold twice within 12 months and with positive profit. Flipping is a normal part of a healthy housing market. In an inflated housing market, expectations about short-term profit from pure price appreciation are very high; therefore, the level of flipping activity would show evidence of being heightened.”

Here are the categories with percentages reflecting the unrealistic ratios & numbers of 2005 as compared to the current market. Remember, a negative percentage reflects a positive gain for the market.

Bottom Line

They say hindsight is 20/20… Today, experts are keeping a close watch on the potential red flags that went unnoticed in 2005.

How Scary Is The Housing Affordability Index?

Some industry pundits are saying that the housing market may be heading for a slowdown. One of the data points they use is the falling numbers of the Housing Affordability Index, as reported by the National Association of Realtors(NAR).

Here is how NAR defines the index:

“The Housing Affordability Index measures whether or not a typical family earns enough income to qualify for a mortgage loan on a typical home at the national level based on the most recent price and income data.”

Basically, a value of 100 means a family earning the median income earns enough to qualify for a mortgage on a median priced home, based on the price and mortgage interest rates at the time. Anything above 100 means the family has more than enough to qualify.

The higher the index the easier it is to afford a home.

Why the concern?

The index has been declining over the last several years as home values increased. Some are concerned that too many buyers could be priced out of the market. Here is a snapshot of the index since 2009:

But, wait a minute…

Though the index has decreased over the last four years, we must realize that at that time there was an overabundance of housing inventory and as many as one out of three listings was a distressed property (foreclosure or short sale). All prices dropped dramatically and distressed properties sold at major discounts. Then, mortgage rates fell like a rock.

The market is recovering and values are coming back nicely. That has caused the index to fall.

However, let’s remove the crisis years and look at the current index as compared to the index from 1990 – 2008. We can see that, even though prices have increased, historically low mortgage rates have put the index in a better position than every year for the nineteen years prior to the crash.

Bottom Line

The Housing Affordability Index is in great shape and should not be seen as a challenge to the real estate market’s continued recovery.

Housing Market Slowing Down? Don't Tell Builders!

Many experts have been calling upon home builders to ramp up construction to help with the lack of existing inventory for sale. For the past two months, new home sales have surged, with July’s total coming in at the highest since October 2007.

The latest estimates from the US Census Bureau and Department of Housing and Urban Development show that sales in July were 31.3% higher than this time last year, and 12.4% higher than last month, at a seasonally adjusted annual rate of 654,000. 

Zillow’s Chief Economist, Svenja Gudell, echoed the reaction of some as she commented:

“July(‘s) new home sales data was a surprise, but a welcome one. For years, the market has been practically begging builders to both ramp up their efforts overall and to put more focus on serving the less expensive end of the market. Today's data confirms both are happening in earnest.”

The National Association of Home Builder’s (NAHB) Chairman, Ed Brady, didn’t seem as surprised:

“This rise in new home sales is consistent with our builders’ reports that market conditions have been improving. As existing home inventory remains flat, we should see more consumers turning to new construction.”

NAHB’s Chief Economist, Robert Dietz, believes this is just the start for new home sales if market conditions continue:

“July’s positive report shows there is a need for new single-family homes, buoyed by increased household formation, job gains and attractive mortgage rates. This uptick in demand should translate into increased housing production throughout 2016 and into next year.”

The existing home sales numbers for July will be released today and will shed more light on the overall health of the housing market.

Bottom Line

New home sales hit their highest mark in over 9 years. Buyers are out in force to find a home that fits their needs. Many are turning to new construction, as the inventory of existing homes has not been able to keep up with demand.

Two Myths About Mortgages That May Be Holding Back Buyers

Fannie Mae’s “What do consumers know about the Mortgage Qualification Criteria?” Study revealed that Americans are misinformed about what is required to qualify for a mortgage when purchasing a home.

Myth #1: “I Need a 20% Down Payment”

Fannie Mae’s survey revealed that consumers overestimate the down payment funds needed to qualify for a home loan. According to the report, 76% of Americans either don’t know (40%) or are misinformed (36%) about the minimum down payment required.

Many believe that they need at least 20% down to buy their dream home. New programs actually let buyers put down as little as 3%.

Below are the results of a Digital Risk survey of Millennials who recently purchased a home.

As you can see, 64.2% were able to purchase their home by putting down less than 20%, with 43.8% putting down less than 10%!

Myth #2: “I need a 780 FICO Score or Higher to Buy”

The survey revealed that 59% of Americans either don’t know (54%) or are misinformed (5%) about what FICO score is necessary to qualify.

Many Americans believe a ‘good’ credit score is 780 or higher.

To help debunk this myth, let’s take a look at the latest Ellie Mae Origination Insight Report, which focuses on recently closed (approved) loans. As you can see below, 54.1% of approved mortgages had a credit score of 600-749.

Bottom Line

Whether buying your first home or moving up to your dream home, knowing your options will definitely make the mortgage process easier. Your dream home may already be within your reach!

Whether You Rent Or Buy, You're Paying A Mortgage

There are some people that have not purchased a home because they are uncomfortable taking on the obligation of a mortgage. Everyone should realize that, unless you are living with your parents rent free, you are paying a mortgage - either yours or your landlord’s.

As The Joint Center for Housing Studies at Harvard University explains:

“Households must consume housing whether they own or rent. Not even accounting for more favorable tax treatment of owning, homeowners pay debt service to pay down their own principal while households that rent pay down the principal of a landlord plus a rate of return.  

That’s yet another reason owning often does—as Americans intuit—end up making more financial sense than renting.”

Christina Boyle, a Senior Vice President, Head of Single-Family Sales & Relationship Management at Freddie Mac, explains another benefit of securing a mortgage vs. paying rent:

“With a 30-year fixed rate mortgage, you’ll have the certainty & stability of knowing what your mortgage payment will be for the next 30 years – unlike rents which will continue to rise over the next three decades.”

As an owner, your mortgage payment is a form of ‘forced savings’ which allows you to have equity in your home that you can tap into later in life. As a renter, you guarantee the landlord is the person with that equity.

Interest rates are still at historic lows, making it one of the best times to secure a mortgage and make a move into your dream home. Freddie Mac’s latest report shows that rates across the country were 3.43% last week.

Bottom Line

Whether you are looking for a primary residence for the first time or are considering a vacation home on the shore, now may be the time to buy.

Real-Life vs Reality TV: 5 Myths Explained

Have you ever been flipping through the channels, only to find yourself glued to the couch in an HGTV ‘show hole’*? We’ve all been there… watching entire seasons of “Love it or List it,” “Fixer Upper,” “House Hunters,” “Flip or Flop,” “Property Brothers,” and so many more, just in one sitting.

When you’re in the middle of your real estate themed show marathon, you might start to think that everything you see on TV must be how it works in real life, but you may need a reality check.

Reality TV Show Myths vs. Real Life:

Myth #1: Buyers look at 3 homes and make a decision to purchase one of them.

Truth: There may be buyers who fall in love and buy the first home they see, but more often than not the process of buying a home means touring more than three homes.

Myth #2: The houses the buyers are touring are still for sale.

Truth: The reality is being staged for TV. Many of the homes being shown are already sold and are off the market.

Myth #3: The buyers haven’t made a purchase decision yet.

Truth: Since there is no way to show the entire buying process in a 30-minute show, TV producers often choose buyers who are further along in the process and have already chosen a home to buy.

Myth #4: If you list your home for sale, it will ALWAYS sell at the Open House.

Truth: Of course this would be great! Open Houses are important to guarantee the most exposure to buyers in your area, but are only a PIECE of the overall marketing of your home. Just realize that many homes are sold during regular showing appointments as well. 

Myth #5: Homeowners make a decision about selling their home after a 5-minute conversation.

Truth: Similar to the buyers portrayed on the shows, many of the sellers have already spent hours deliberating the decision to list their home and move on with their life/goals.

Bottom Line

Having an experienced professional on your side while navigating the real estate market is the best way to guarantee that you can make the home of your dreams a reality!

How Do Rising Prices Impact Your Home Equity?

Yesterday, we shared the results of the latest Home Price Expectation Survey by Pulsenomics. One of the big takeaways from the survey is that over the next five years, home prices will appreciate 3.5% per year on average, and cumulatively will grow by around 18%.

So what does this mean for homeowners and their equity position?

For example, let’s assume a young couple purchased and closed on a $250,000 home in January of this year. If we only look at the projected increase in the price of that home, how much equity would they earn over the next 5 years?

Since the experts predict that home prices will increase by 4.5% this year alone, the young homeowners will have gained over $11,000 in equity in just one year.

Over a five-year period, their equity will increase by over $46,000! This figure does not even take into account their monthly principal mortgage payments. In many cases, home equity is one of the largest portions of a family’s overall net worth.

Bottom Line

Not only is homeownership something to be proud of, it also offers you and your family the ability to build equity you can borrow against in the future. If you are ready and willing to buy, let's meet up to find out if you are able to today!