Deciding whether to take out a new mortgage when retiring is a significant decision that can impact your financial stability during this transition. With mortgage rates hovering around 7% and home prices steadily rising, taking on a large debt can increase the risk in your financial situation. Despite this, more than a third of homebuyers between the ages of 59 and 98 financed their purchases, highlighting the commonality of this decision among retirees.
When applying for a mortgage in retirement, it is illegal for lenders to discriminate based on age. Lenders primarily focus on your ability to repay the mortgage with various sources of non-paycheck income. These sources can include Social Security benefits, pension or annuity income, disability payments, and income from investments like your 401(k) or IRA. Lenders may also consider a portion of your income that is not subject to tax as 25% more valuable, in certain cases.
To calculate your income from your assets, various methods can be used such as the asset depletion method or taking monthly distributions from an IRA. Lenders will also evaluate your debt-to-income ratio, considering your expected mortgage payment along with other outstanding debts. Ideally, your debt level should fall below the maximum limits set by lenders for conventional or jumbo loans. Additionally, the higher your credit score, the better interest rate you can secure on your mortgage.
Before seeking a mortgage, it is essential to have a clear understanding of your expected monthly income and expenses in retirement. Consider how your income may decrease compared to your pre-retirement earnings and how expenses such as medical costs and property taxes may increase over time. Furthermore, think about the impact on your household income if one spouse were to pass away and whether you can comfortably afford to carry a mortgage under those circumstances.
It is advisable to weigh all financial aspects when considering taking out a mortgage in retirement, taking into account the stability of your investments, housing market returns, and potential health needs. Additionally, evaluate whether you can put down at least 20% to avoid paying private mortgage insurance and if you are comfortable maintaining the home. Calculate whether your mortgage interest rate is lower than a reasonable rate of return on your investments to make an informed decision on your financial situation.
Ultimately, the decision to take out a mortgage in retirement requires careful consideration of various factors such as income sources, debt levels, expenses, and investment returns. By evaluating these aspects thoroughly and seeking professional financial advice, retirees can make a well-informed decision that aligns with their financial goals and retirement plans.
