Even in retirement, housing costs will likely continue to be one of your biggest expenses. If you’re nearing the big day and looking for ways to help lower your housing costs and possibly boost your retirement income, consider downsizing your home. Here are four reasons why a smaller home could mean more money in retirement.
Lower monthly payments
A smaller home will likely mean a lower mortgage payment each month. Giving up your $150,000 home and moving into a $100,000 place will likely reduce your debt plus save you thousands of dollars in mortgage interest.
Consider whether taking out a new loan is right for you. The proceeds from selling your existing home could be used to pay cash for a smaller home, eliminating a monthly payment all together. Or a new mortgage might make sense if you’d like to preserve the cash for other purposes and can still afford payments. If you do decide to finance, choose a mortgage that will give you a lower payment. A 10- or 15-year LGFCU Fixed Rate Mortgage may be a good idea. To save on interest costs and pay off your mortgage more quickly, make extra payments to your mortgage each month.
Similarly, an Adjustable Rate Mortgage (ARM) could also offer benefits when downsizing. An ARM loan typically starts at a lower rate than a fixed rate mortgage and adjusts up or down at a certain point specified in your mortgage contract. If you go with a 5-year LGFCU ARM loan amortized over 10 years your payment will be lower than a fixed-rate mortgage payment.
You can get a 5-year LGFCU ARM that can be amortized from between five years to 30 years, adjusting in 5-year increments. The rate is subject to change every five years, with a possible maximum rate adjustment of two percent annually or six percent over the life of the loan. Even with the adjustment you still typically pay less interest than with a fixed rate.
You also want to avoid paying for extras like private mortgage insurance (PMI), if possible. Many lenders require PMI on new mortgages, but LGFCU doesn’t. This approach could save you even more.
Generate future retirement income
After some time in your new space, consider investing the savings from your home sale to generate future retirement income. One safe option is a Share Term Certificate (STC) (also known as a certificate of deposit or CD). An STC offers a higher interest rate than a traditional money market account over a fixed-term (e.g. 6-, 12-, 18-, 24-, 30-, 36-, 48-, or 60-months). This a great way to safely save for goals like ensuring retirement income.
A CD Ladder or STC ladder allows you to automatically keep reinvesting. You purchase several certificates with staggered maturity dates on a monthly or annual basis. As each certificate matures, you can either put the money back into the ladder or use the funds immediately.
Reduce your tax burden
A smaller home could mean a smaller property tax bill and more savings. North Carolina has several property tax relief programs for seniors aged 65 and older, including a property tax exclusion program (See your county tax assessor for details.). If you prefer to move, compare the property tax rate you currently pay to the rates found in areas you may choose as your new home to see what you might save.
No need to keep up with the upkeep
With the kids out of the house, the big family home may seem like too much to heat and maintain. On top of any savings from lower utility bills and upkeep, you’ll likely gain a smaller homeowner's insurance premium since you’ll have fewer square feet to insure.
Selling your family home is a big decision. Use a retirement calculator to determine your retirement income needs and if downsizing could help.
The advice given is for informational purposes only. Contact your financial advisor or mortgage loan officer for additional guidance.