Retirement is a time when many choose to purchase the house of their dreams or to move closer to their family.
However, it may not always be to your advantage to purchase a home right away and renting may prove more beneficial. It’s important to consider the following before purchasing a new home.
1. Consider Your Length of Ownership
One of the most important aspects to consider when purchasing a home is the length of time you plan to spend in the area.
Different jobs and lifestyles may require you to move around more often, which may make renting a more attractive prospect. Retirees with failing health or mobility problems may wish to consider how long they can remain independent before they will need to switch to a continuing care community.
If retirement is right around the corner for you, it’s important to consider whether you would like to stay in your area or move to a different state during retirement. If you plan to stay in one place for at least seven years, there’s a good chance that buying a home will be the better decision.
This due to the cost you’ll incur when the time comes to sell. Realtor costs generally run around 5% to 6% of the selling price of your home. I find that seven years is the average length of time that the closing costs, maintenance costs, and realtor fees need to be spread over to compete with simply renting the home.
2. Monitor Mortgage Interest Rates
Currently, the low interest rate environment makes fixed rate mortgages an attractive incentive to purchase a home. According to Bankrate.com the current average (as of December 12) for a 30 year fixed mortgage is 3.39% for those with excellent credit. If you are planning to purchase a home in the next few years, you will most likely be in luck. The Fed’s downward pressure on interest rates will likely keep rates low for the next several years.
3. Analyze Your Taxes
Under current tax law, married filing jointly homeowners whose primary residence mortgage is $1 million or less can deduct their mortgage interest if they itemize. If you own a home and itemize your deductions instead of utilizing the standard deduction, you probably benefit from the mortgage interest tax deduction.
In general, deductions are worth more to higher income earners because they pay a higher share of their income in taxes. Therefore, from a tax perspective, it becomes more advantageous for higher income earners to purchase a home instead of renting a home. For example, a $20,000 mortgage interest deduction for someone in the 35% tax bracket will save them $7,000 in taxes whereas someone in the 25% tax bracket will only save $5,000 in taxes. Its important to consider the tax benefits for both your current tax bracket and the tax bracket you might expect to be in during retirement.
Additionally, when you sell your primary residence the first $500,000 of the gains on the sale are excluded from taxation for a couple that is married filing jointly. Any profits you make on the sale of your home that exceed $500,000 are taxed at capital gains rates.
Be Aware Of Possible New Tax Law Changes In 2013
Due to the fiscal cliff discussions in Congress, the mortgage interest tax deduction is on the chopping block. Congress could generate over $87 billion in tax revenue if they eliminate this tax deduction. If this is put into effect, the bulk of the tax benefits that come from owning a home would disappear, which would make renting a more attractive option.
Once the new tax laws for 2013 are finalized I’ll do a case study examining a common scenario a retired couple could expect to experience when they purchase a home.