Buying a Home: Interest Rate Changes
In the past few months, I have been engaged by a handful of clients for help regarding a real estate transaction. The decision to sell a home and embark on a new chapter–especially during retirement–is a significant milestone with unique financial considerations.
Mortgage Interest Rates have dramatically increased over the past 18 months (see chart) and reached a high of almost 8% in October 2023. These conditions will impact the real estate industry by reducing the number of homes built and sold as high-interest rates slow the flow of capital.
As a seasoned financial advisor working primarily with retirees, I understand the intricacies involved in this transition, including the critical considerations and expert insights necessary to guide retirees through the process of selling their current home and purchasing a new one.
Assessing Your Retirement Plan:
Before venturing into the real estate market, it’s essential to revisit your overall life plan and retirement strategy. Determine your housing needs based on factors such as lifestyle preferences, proximity to family and healthcare facilities, and anything else you desire to build your best living situation. Understanding these goals should guide your decision-making process so you can determine if or when it’s the right time to sell your current home and find a new housing environment.
Selling Your Current Home: Fix It Up? Or Sell It as Is?
Start by assessing the market value of your current home. Engage the services of a reputable real estate agent specializing in the local market to ensure a fair and competitive listing price. Consider making necessary repairs or updates to enhance your property’s appeal and potentially increase its value. With a solid understanding of your property’s market value, you can make informed decisions regarding your next steps.
Navigating the Sale Process: Don’t Get Stressed Out!
Selling a home in retirement involves navigating a complex process, from staging and marketing to negotiating offers. Work closely with your real estate professional to streamline the selling process and maximize your return on investment. Consider the timing of your sale, taking into account market conditions and potential tax implications to optimize your financial outcomes.
Financial Implications of the Sale: Know Before You Finalize Your Sale
Consult with your financial advisor and tax professionals to evaluate the financial impact of selling your current home. Understand the tax implications, including capital gains taxes, home sale exclusions, etc. that may apply to your situation. Professionals explore strategies for minimizing tax liabilities, maximizing your net proceeds from the sale, and helping fund the purchase of your next home. With the help of your financial advisor, carefully consider how the funds from the sale will align with your overall retirement income and spending plan.
Purchasing a New Home in Retirement: Make a List of Factors
Before deciding to sell your current home, you should be able to clearly describe your ideal living scenario. Sit down with your partner and family to discuss and identify which features, locations, and amenities are critical for your next chapter in life. When purchasing a new home in retirement, prioritize factors such as accessibility, maintenance requirements, and proximity to essential services. Consider the potential lifestyle changes accompanying retirement and choose a property that aligns with both your evolving needs as well as your desires for how you want to enjoy your golden years. Leverage the expertise of a real estate agent who understands your unique goals and preferences and is familiar with the location of your house.
Options Acquisition: A Change in Interest Rates
The change in interest rates from January 2022 through the end of October 2023 have dramatically impacted the financing costs of home ownership, especially for individuals buying a home in retirement. Since 2010, the 10-year Treasury Bond’s rate has remained below 4%, meaning that the 30-year mortgage rate was below 5.5%, and during the pandemic recovery, the 30-year mortgage rate fell to below 3%. We have enjoyed incredibly cheap borrowing costs for more than a decade. However, the era of cheap money is over. 30-year mortgage rates are now closer to 8%, meaning monthly payments to finance the same loan value have more than doubled. Choosing how to pay for a house in retirement now involves a more significant analysis of your situation and goals.
Considering Your Options: A Case Study
As a financial advisor working primarily with retirees, I believe that my clients need a trusted advisor to help them outline their best lives, consult about significant decisions, and provide actionable financial advice to help them build wealth. I consider changing your housing environment an opportunity for me to add value for my clients by implementing a good solution and providing the confidence that the decision is possible based on their financial plan. Here is a recent case study as an example of how I helped one client make the best decision for their future.
Recently, one of my clients moved into a property she had previously been renting as a part of a relocation strategy from Ohio to North Carolina. This decision was highly prudent for her at the time as it allowed her to relocate, start learning about the city, and build her new life. After living there for almost two years, she decided she was ready to relocate and found a new house that perfectly fits her needs. Being in real estate, she started by seeking a new loan for the property and was shocked by the impact of the new mortgage rate environment. Given that she is in retirement, we worked together to analyze her monthly cash flow situation. After that analysis, I recommended she consider taking the funds from her investment portfolio to pay for her new house. The money she would have borrowed would have cost her 7.79%, which was the interest rate of a new loan. Investment Portfolio returns are unpredictable, and in her case, she decided to manage her investment risk by using a portion of her portfolio, thus leading to a more predictable cash flow situation.
Whether you choose the financial freedom of a cash purchase or the strategic leveraging of a mortgage, make a decision that aligns with your overall financial well-being and helps you pursue your life’s passions.
Closing Thoughts
Interest rates have been climbing for three years, and economists are starting to see their impact on the economy. Stock market prognosticators predict that interest rates have hit their ceiling and will fall in 2024 based on the Federal Reserve’s actions and other market factors. Personally, my wife and I talk of moving sporadically, but it’s hard to give up our loan interest rate (3.1%) to refinance at over 7.5%. So, consider waiting a little – a year or two will potentially save you money.
However, it’s also worth considering that higher interest rates are generally good for retirees. In general, acquiring a good cash flow from your assets has been extremely difficult since 2007; that is not the case today, with money markets offering 5.4% and other investments paying higher yields.
In either scenario, it’s prudent to engage your financial advisor and determine the impact of this change on your financial plan. The decision to relocate is nuanced and depends on various factors specific to your financial situation and goals. As a financial advisor, I am happy to work with you to carefully weigh your option’s pros and cons, considering your long-term objectives, and the prevailing market conditions. Contact me directly at (859) 203-1414 or Chris@EnryPointWM.com so we can start planning for your future home, today.
