After the kids have grown up and moved out, many Americans are weighing whether to “age in place” or downsize to a smaller home as they head into the next chapter of their lives. In fact, a 2018 study for Fannie Mae predicts a 42% increase in the number of older Americans exiting homeownership between 2020 and 2036, compared with the decade ending in 2018.
To help navigate the decision, here are the most important considerations.
Baby Boomers (Americans born between 1946 and 1964) are sitting on over $6 trillion of home equity, according to the Mortgage Bankers Association.
Whether or not you’ve fully paid off your mortgage, the equity in your home can provide the financial freedom and flexibility to re imagine life during a second (or third) act. To better understand the options and how to leverage existing equity, it’s important to speak to a professional, says Peter Jianette, northeast divisional director at Chase. “Speak to a [Chase] Home Lending Advisor to make sure a plan makes sense.”
One crucial consideration when it comes to downsizing is retirement. The Insured Retirement Institute’s (IRI) annual Baby Boomer report has consistently shown that “Boomers are largely unprepared for retirement: unrealistic in their expectations and under-saved.”
Housing may provide a financial lifeline for Boomers. “Collectively, the vast inventory of homes possessed by older Americans”—approximately 46 million homes—“is worth an estimated $13.5 trillion,” according to Fannie Mae.
Rather than dipping into savings or going deeper into debt, older Americans can often leverage the value of their homes to address their retirement needs.
“The best advice when a customer is trying to better understand what is in their best interest— stay or downsize—would be to meet with our One Chase Team,” says Jianette.
Figure out where you want to live and what lifestyle is the best fit. Some retirees find apartment living in urban areas attractive because of access to mass transit, culture and entertainment. Others prefer to live in warmer climates, or want to be near their kids and grandkids.
Whatever appeals to you, make sure you’re aware of market conditions—both where you’re planning to sell and hoping to buy. That will help determine whether now is a good time to sell and what kind of home you can afford.
The U.S. housing market is strong overall, but the value of your home can and will likely fluctuate over time. While the market is stable today, there’s no guarantee of the future—so that’s a risk to keep under consideration.
Moving can be expensive, even if you’re downsizing. There are also costs associated with both buying and selling homes, including real estate agent commissions, home improvements, transfer fees and taxes.
Some of these costs may be obvious, others less so. That’s why it’s important to use the resources Chase provides to ensure there are no surprises. “We just want to make sure the customers are 100% in the know of what they’re signing up for,” Jianette says. For example, many retirees looking to downsize are surprised to find they may not qualify for a mortgage because their income is greatly decreased from their working years.
“The same underwriting criteria goes for a smaller house—retirees need to be able to qualify for a mortgage on their own,” Jianette explains. “The last thing any lender wants is to put someone in a home they can’t afford.”
In addition, he notes that while many empty nesters “can afford the general maintenance of the house, rising property taxes can cause uncomfortable stress,” especially for those living on a fixed income.
Also, if you’ve owned your home for a long time—say 15 years or more—odds are it has increased in value, which can mean capital gains taxes when you sell. Speak with your tax advisor about your situation before deciding to buy or sell.
While the details can seem intimidating, you can lean on a Chase Home Lending Advisor to help guide you through the process.
“Our Chase Home Lending Advisors do an amazing job creating a goal-based plan with our customers,” Jianette says, “and discussing what would be the best for that individual customer.”
Source: Deciding To Downsize