En español | You've considered this choice for years: You own your home, but the children are gone and it seems too big for you. Do you become a renter? Or hold on to your home, or buy a smaller one? Here are some questions to ask yourself before making a move.
— Tim Klein/Gallery Stock
Can you get more for your money renting versus buying?
The answer depends on where you live and current mortgage rates. In many areas, people are having trouble selling their homes, so they're renting them instead, making more rentals available, says Elaine Scoggins, a certified financial planner and director of Merriman, an investment advisory firm in Seattle.
In fact, the Census Bureau reported in 2009 a record high number of empty rentals, meaning you may be able to rent a nice place for less than previously. At the same time, the large number of troubled, bank-owned properties or houses that are selling for less than what's owed on them have driven prices down, so you also may be able to buy a great house for less money.
Do you need the cash to live?
Liquidity is crucial in retirement. "If you've got all your money locked up in a house, you've got all your money locked up in a house," says Russell Wild, a financial adviser in Allentown, Pa., and coauthor of One Year to an Organized Financial Life. While that statement seems obvious, many people forget that few investments are as difficult to liquidate as real estate.
If you can't live on your Social Security, pension and savings, eventually you might be forced to sell the house. It might be better to do that now, while you have time to do it properly, rather than waiting until the crush arrives and you have to sell quickly for whatever the market will offer.
Are you factoring in all costs?
You may think that renting is throwing away money every month, but the truth is, a house is not necessarily a good investment. "People use their houses as piggy banks," but a house can be just another expense, says Jennifer Cray, a partner at Investor's Capital Management in Menlo Park, Calif.
A study done by the former Office of Federal Housing Enterprise Oversight showed that if you bought a house in 1977 for $50,000 and it increased in value to $290,500 in 2007, you would actually have lost $103,000 when you factor in the cost of mortgage interest, taxes, insurance, maintenance and repairs. So, when crunching the renting versus buying numbers, make sure to include all the costs. You also may want to factor in possible gains if you had invested the equity in your home in something else.
Do you need the mortgage interest deduction?
There are no clear-cut answers because everyone's tax situation is different, says Cray. However, assuming you're itemizing your deductions, Cray suggests letting your tax bracket guide you.
Look at line 43 on your most recent 1040 federal tax form to see your taxable income. Then check where that number falls in the IRS tax tables. If you're in the 25 percent bracket or higher, Cray thinks you're probably getting enough of a deduction on your mortgage payments that you might lean toward downsizing to a smaller house with a mortgage, rather than renting.
Look at your mortgage company's statement to see how much of your mortgage payment is interest versus principal. If your current mortgage will be paid off in 10 years or less, most of your payment probably isn't going to interest, so you wouldn't be getting much of a tax advantage by staying where you are.
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