Advantages and Disadvantages of Owning a Home in Retirement

In retirement, owning a home can have distinct advantages over renting, depending on what city or region of the country you decide to retire. You might choose to stay in the home you currently live or downsize and buy a smaller home for retirement.  Before making a final decision consider both the up and downsides of owning a home during your retirement years.
Advantages of Owning a Home in Retirement

Leave an inheritance to heirs. Home ownership can lock in equity because it is harder to get to than cash. As a result, you can leave the home to your children or grandchildren as a legacy. They can live in the home, or sell it, depending on their needs. If they choose to keep they home, the value resets at the time of death, not the value when you purchased it, giving them an asset that will continue to grow tax free for many years.

Predictable housing costs. Renters have no control over the rise in rental rates. With a mortgage, you can lock into a fixed rate and have relatively predictable living costs in retirement. You will still have variations in property taxes and homeowner’s insurance over the years. The unpredictable part of home ownership includes maintenance, upgrades, and other housing cost. It is possible to mitigate some of these costs through the purchase of insurance.

Chance to live mortgage free in retirement. Paying off a mortgage used to be a rite of passage for the elderly. Today many seniors still pay a mortgage payment well into retirement. With adequate market growth or home equity you could downsize and pay cash for a home, complete a reverse mortgage, or pay off the mortgage to eliminate those costs in retirement, allowing you to live on substantially less. You could reduce housing costs to an estimated 3% of your overall budget if you can live in retirement without a mortgage.

Lower long-term housing costs. While renting typically offers better short term cash flow because you do not need to tie up assets with a down payment, closing costs, etc., rentals are cheaper to get in and out of when looking at short term costs. Studies show, however, that five years tends to be the breakeven point where you gain enough appreciation in the home to cover the costs of buying and selling the home. Staying in a home for a decade or more almost always tips the scale towards home ownership from a purely financial point of view.

Ability to trade a single-family home for a condominium. You have the option of selling an older home with a yard and lots of maintenance needs for a newer condo that gives you many of the benefits of apartment living without giving up home ownership. Condos tend to take care of plowing the parking lot in the winter and caring for the lawn. They also cover external requirements such as the roof, and plumbing into the building. A newer home lowers maintenance costs and will have many amenities seniors need as you age. You can reduce the square footage without giving up the aspect of homeownership.

Disadvantages of Owning a Home in Retirement

Difficult to access cash. While you have an asset that will hopefully grow over time, qualifying for a loan, equity line or other mortgage type instrument could be more difficult in retirement because of limited income. Setting up an equity line of credit based on the home’s value near retirement could be a work-a-round that allows you to access home equity as needed and convert it to cash, should you need to do so after retirement.

Less flexibility. Home ownership locks you into a certain location. To move you must sell or rent the home, which takes time and money to accomplish. Renters can end a lease every year and move around as life changes. Selling a home after a year or two of ownership because your circumstances chance could result in a financial loss.

Maintenance and yardwork. Many people like to tinker around the house, garden, and  do other yardwork. If this is the case, it might actually be an advantage because it will give you something to work on in retirement. For others, the thought of fixing a leaky faucet and mowing the lawn or shoveling snow is not the way they envision spending retirement. While you can always hire out these services, that will add to the budget raising costs.

Many Baby Boomers plan to move as they retire and based on your personal circumstances and needs will determine whether you are better off renting or owning in the next chapter in your life. There are many advantages to home ownership, and in many cases the positives outweigh the negatives. You can use a rent versus buy calculator to help you work out the financial Impact of the decision.