For most people, buying a second home is an extravagance that probably doesn’t make much sense right now, especially if one’s job situation is at all shaky. But one group may be an exception: homeowners who plan to retire and move, but not for a few years.
These near retirees can capitalize on today’s weak market to pick up their next home at a discount, while hanging on to the current home until prices recover.
The ideal candidate has a home that is paid for or carries a low mortgage payment, leaving enough income to cover the new mortgage. For the gambit to make financial sense, you’ll probably have to rent out the new property until you’re ready to move, rather than use it for vacations.
There’s no doubt that supporting two properties makes life a bit riskier. If you do not plan to rent out the retirement home, the mortgage payments and other costs will reduce the benefits of buying at today’s low prices.
Suppose you bought a $300,000 home with a $60,000 down payment. The standard 30-year, fixed-rate mortgage currently averages 5.367%, according to the BankingMyWay.com survey. The Mortgage Loan Calculator (http://www.bankingmyway.com/calculators/mortgages/mortgage-loan-calculator-piti) shows that would give you a monthly principal and interest payment of $1,343.
That comes to $80,580 over five years. In other words, the property would have to be worth more than $380,580 five years from now to justify spending $300,000 today. That is a 27% gain, which is a lot to expect in just five years.
Use the Mortgage Tax Saving calculator to see how federal income tax deduction on interest payments would reduce your mortgage cost.
Remember to include local property tax and homeowner’s insurance in your costs. If the retirement place will be a long way away, you may need to pay for a manager and have pros mow the lawn and do all the other chores you normally do yourself. So these costs have to be counted as well.
Given the heavy carrying costs, it would make the most financial sense to rent the property out until you are ready to move. A rent of $1,000 a month in the example would produce $60,000, reducing the net mortgage cost to $20,580. That’s just 7% of the purchase price. Appreciation could well exceed that over five years, making a purchase today a winner.
The agent who helps you buy the retirement home can probably offer some guidance on rental rates, and there are lots of online rental services that provide insight into the market. Don’t count on getting a maximum rent every single month. In many markets there is a glut of rentals, driving down rates and pushing up vacancy rates.
The 30-year fixed-rate mortgage is an awfully good deal these days. But the near retiree could save a bit with a five-year or seven-year adjustable mortgage. These carry a fixed rate for the initial period, then adjust every year. The risk of facing high rates in the future wouldn’t matter if you intend to sell your current home in a few years and use the proceeds to pay off the loan on the retirement home.
Five-year ARMs average 4.859%, but you can find better deals with the shopping tool. ING DIRECT (Stock Quote: ING) offers a 5/1 ARM for 4.5%, while Wachovia (Stock Quote: WFC) has one at 4.25%.
If there’s no loan on the current home, or a very small mortgage, you could refinance to raise the money for the retirement home. That way you could avoid the heavier scrutiny lenders give loans for second homes.
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