Many people worry they need to save for retirement and down-payment on a home. Using funds from IRAs or 401(k) for the down payment does not sit well with investment managers. The reality is that these home buyers are doing exactly the right thing. Here are the reasons why:
Rent is Rising
One thing that is inevitable in San Diego County is that rent will rise. For the last 10 years, we have seen rents rising. These last 5 years, it has been rising much faster than pay increases. In fact, rent has been rising between 3 and 5 times as fast as income. This is the driving force behind so many politicians speaking of a housing crisis.
Interest Rates Remain Low
While you may have noticed that interest rates are now in the 4s instead of the 3s, they are still well below the 7s of the decade before the financial melt-down 12 years ago. Parents and grandparents may remember when mortgage interest rates were 20%. In the face of this, paying 4.4 or 4.8 or five plus percent interest is a great deal. Just make sure you get a Fixed Interest Rate loan. Once you do so, your cost of housing will not change for 30 years!
People will tell you that you could have invested the money and turned it into a hefty retirement fund. And where do you live during your working years? Put it into a home that provides you shelter even as it appreciates in value. Where as you are paying down your debt, you are increasing your ownership. But doesn’t this mean that your money is locked up in your home? Isn’t it necessary to sell the home to get the money? Then where will you live?
Accessing Your Equity
In fact, there are several ways to benefit from your home:
1)The simplest is to downsize into a smaller home, perhaps taking your tax-basis with you. There are other options, as well, that allow you to stay right where you are.
2) You can opt for an FHA Reverse Mortgage where you can withdraw anywhere from 50% to 75% of the value of your home depending on your age. There are no monthly payments, ever. You are required to live in the home. If you move out for 1 year or more, the lender will force the sale of the home. If there are any profits leftover from the sale of your home, they go to you or your heirs. If there is a deficit, you and/or your heirs are not liable for the amount due.
3) You can donate your home to certain non-profits that will agree you own it for the rest of your life. If you decide to move out and rent it, you still own it for as long as you live. The agreement also sets you up for a monthly income for as long as you live. The amount you receive depends on many factors, including the value of the home, the condition, your age and so forth.