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.
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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.
Will you be penalized for selling your house?
Do the math to see whether or not you're going to have a capital gain on the sale of your house.
The basic formula: Start with the purchase price of the house, plus fees you incurred when you bought it, such as mortgage points, then add in the cost of all the capital improvements done over the years (new bathrooms, new carpeting, new windows, etc.). That's your "basis." Then take the expected sales price, subtract deductible selling costs (broker commission, fix-up costs, fees, etc.), and subtract the basis from that figure and you've got your capital gain. The rules are explained on the IRS website.
So, let's say you bought your house for $100,000, you put $50,000 into it over the years and you spent $5,000 to fix it up before you sold it. If you expect to sell it for $500,000 and you have to pay a $30,000 broker fee, you can expect a capital gain of $315,000.
If you're single, you can exclude $250,000 of that from being taxed. If you're married or were widowed within two years of the sale and have not remarried, you can exclude $500,000. If your capital gain is more than you can exclude — meaning you'll have to pay a tax — it may be more financially sensible to stay in the house you're in.
Of course, if you're in a situation where your house is worth less than what you paid for it, it may make sense to stay put and wait for its value to rise.
What's your personality?
Renting can sometimes take a strong stomach. Your landlord could get foreclosed on, or leave town and sell your place, or up your rent when it's lease renewal time. Can you live with that kind of risk?
Some states have laws and regulations regarding tenants' rights and rental rates, so look into local rules if you're considering renting.
Of course, owning a home has its ups and downs as well. Although your locked-in mortgage rate won't go up, your property taxes may vary year to year and you may be affected by property value fluctuations in the local market.
Do you want to deal with upkeep?
If you're considering staying where you are, there's probably a great deal of maintenance to do on your home. "Just like a car, the more mileage a house has on it, the more repairs it will need," says Cray. You may be able to postpone the cosmetic things indefinitely, but the basic maintenance that you can't neglect tends to be costly: roof, termite/rot damage, plumbing, furnace. Be honest about whether it's a good idea for you to climb a ladder to clean the gutters or do the heavy landscaping work.
With a rental, all those maintenance chores may be done for you. Negotiate with the landlord and make sure it's reflected in your lease. If you decide to downsize, consider a townhouse, condo, co-op, or retirement community where a maintenance fee covers those kinds of chores.
What do you want from your home?
Some people take great pride in owning a home. They like having a garden and putting their own stamp on the house with custom paint, wallpaper and built-ins, which is something you can't do with a rental. If you're a pet owner, you may have trouble finding a rental that will accommodate Fido.
On the other hand, renting gives you the freedom to pick up and visit your children or grandchildren for a few months between leases and not have to pay the mortgage on a house you're not living in or worry about watering the lawn. Another upside to a rental: If you don't like the neighbors, you can move out once the lease is over.
Leslie Pepper is a freelance writer based in Merrick, N.Y.