Ask Money

Rent or own

Chris Farrell Apr 2, 2010

Question: We are currently renting (and paying ridiculous rent) having sold our house in 2008 with some equity. We are looking to move out of the area where housing prices are less. We are also early retirees (55 & 52) and are trying to decide: (1) whether prices are depressed enough so that it is the time to buy or should we rent something for a while to get more familiar with the area where we would like to move; and (2) whether we should pay all cash for our retirement house with no mortgage or invest the equity proceeds and take out a mortgage. Micki, Irvine, CA

Answer: My guess on home values is that the trend is for still slightly lower prices. But the future is best described as stagnation for a considerable period of time. Of course, that’s a guesstimate.

I do strongly recommend living in an area before buying. Several years ago I had a public television program, Right on the Money. In one show we profiled Angela, a freelance writer with a good career. In her early 50s around the time the dot.com bubble burst, she owned her own condo, had a retirement savings plan, no debt (other than a mortgage) and excellent credit. But she yearned for a real house in the country. She sold her condo and bought a cabin in a ski resort outside of Los Angeles. She says she was seduced by the beauty of the countryside, the mountains, and the quiet. It wasn’t long before she was bored and isolated. She missed the coffee shops and all the activities of a city. Eventually she sold her place and moved back to the city. It was an expensive adventure.

So, I’d rent where you plan on living. Learn about the neighborhoods. Figure out what you like to do during the day. You’re also young and you’ll probably want to check out the job market, including part-time and temp-type work. I’d put down stakes when and if it turns out that reality matches your dreams.

A mortgage or not? I’m a big believer in living in retirement without a mortgage. It gives you a valuable safety net and financial freedom. Still, in the short-run I’d lean toward keeping your options open. You could always put down a hefty down payment, get the best mortgage rate available, and lock in a reasonable monthly payment. When you have settled down into your new life and have a detailed knowledge of your income and your expenses, you could pay off the mortgage if that’s the right move at the time. (There shouldn’t be a prepayment penalty with a fixed-rate mortgage; just make sure before you sign any document.)

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