Ask Money

Buying a retirement home

Chris Farrell Sep 12, 2008

Question: My girlfriend and I are both in our mid 50s and thinking ahead to where we want to live when we retire. Here’s a summary of our current financial situation. We each own our own homes and don’t have any mortgages, car loans, or credit card debt. Her house has a tax appraised value of about $150K and mine is $390K….. She plans to retire in 5 years, receiving a pension from the state. But I will probably wait till full retirement age.

We’d like to buy a house about an hour North of us in a small New England resort town. The property taxes are low, and it will be an interesting place to live. I enjoy doing remodeling work, so we’d like to get something that is older that we’ll be able to rehab to our liking, in particular making the property as energy efficient as possible, as well as completely handicap accessible. (We’re able bodied now, but…) We’re looking for properties in the range of $150K to $250K, although our hope is to keep it at the lower end to keep our future property taxes lower. (NH has no sales or earned income taxes, but property taxes can be a problem for retired folks.)

What I can’t decide is how to finance the new property and budget for the renovations. Would it be better to finance the bulk of the new property, reserving my cash for the renovations. Or would it make more sense to use the bulk of my cash to buy the property, and then get a mortgage on the remainder and use a home equity loan to pay for renovations. For that matter, could we mortgage one of our existing homes to help pay for the new property, thereby owning it free and clear, and then pay off the remainder of the mortgage when we sell that house? Do you have any general advice on what would make the most sense in terms of making the most of our resources? First Name: Bill, Barnstead, NH

Answer: First of all, before getting to your financial question, I want to highlight your idea of making improvements now that will make it easier to stay in your home as you and your woman friend age. It’s something homeowners should take into consideration with remodeling projects.

For instance, if the home has more than one story, you might consider putting in a bedroom and full bath on the first floor in case the day comes when stairs are too difficult to climb. Bathrooms can be made safer with high-quality non-slip tile, and showers installed with no lip for easy wheelchair access. Kitchen counters can be designed at different heights to accommodate sitting as well as standing. For people in the 50s and 60s, if they’re doing a major remodeling, it’s the ideal time to make changes that will let them remain independent.

That said, let’s look at the finances. You and your woman friend have solid finances. I would not put the new home on to your existing homes. Let’s not put the value of those assets at risk.

It reads as if the remodeling, fixer-upper project will take a considerable period of time. If that’s the case, your best bet will be a home equity line of credit. It’s ideal for home improvements done over a period of time, a project here, a project there. A home equity loan is better when there is a major renovation to be done within a certain time frame.

So, a conservative plan would be to put more money down and take on a smaller mortgage. I would worry less about reserving the cash for home renovations. You can do some smaller, more sweat equity-type projects at first, get to know the place well, really figure out what you’d really like to do it, and then get more aggressive–and have more fun–once you’ve sold your places and moved into your new house up north.

It’s clear that you two have carefully thought through this move. Still, I’d emphasize that you’re investing in this property together. I would have a lawyer draw up a legal document that spells out and protects both you and your friends investment and lays out the financial responsibilities.

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