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Published on 07/03/1995 All articles from this issue

Tough decisions

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By Clyde Noel / Town Crier Staff Writer

To pay cash for a retirement home or take a mortgage?

If you've been looking around for a home in which to spend the rest of your retirement years, you could face a difficult decision. With the way taxes on estates and even residential houses are increasing, the wrong decision could cost a lot of money.

Los Altos Realtor Bob Morton of Coldwell Banker asks, "If you're a senior and you feel you can't take care of the old place anymore, are you better off using the proceeds from the sale of your old home to pay cash for a new home, or should you get a new mortgage?"

That decision, Morton interprets, is not an easy answer, because it's an emotional decision as well as a financial one. From a financial point of view, a mortgage would be better because you could get a 15-year loan and invest the money from the sale of your old home so it would generate enough income to cover your mortgage payments. Plus there would be extra money to spend.

A lot of seniors consider reverse mortgages. But they aren't for everyone, and there are other ways to solve the problem of being house rich and cash poor. Morton offers these alternatives by using the $125,000 exemption on home profits:

There are different forms of reverse mortgages that are available to people 62 and older. Because the amount you can draw out is determined partly by your life expectancy, the older you are, the higher the payments can be from your given amount of equity. And with a home equity, there will be less for your heirs when you die.

Financial planners have determined that many retired clients, even if they are just getting by or have more money than they know what to do with, want to live in a paid-for house without the burden of mortgage payments. So paying cash up front for satisfaction makes that decision easy to make.

"For many people," Morton explained, "the emotional part of this decision outweighs any of the financial issues. Often the peace of mind that comes from having a paid-for house in retirement is the most important goal.

"If your home is too big or just isn't right for you anymore, consider selling it and buying a less expensive home. You might want to pay cash for the second home and then invest the difference," Morton said.

Suppose you sell your house for $400,000 and your tax basis is $125,000. That's the price you paid for the house years ago. If you are over 55, you can use your one-time $125,000 exclusion and you pay taxes on the profit of $150,000 or find a townhouse or a condo in a retirement community for $150,000.

With this smaller home, you'll have lower property taxes, insurance premiums and home maintenance costs. Plus, you will have $150,000 to invest You can put that money into Treasury notes and it will bring close to $10,000 more to live on before taxes.

Or you could put the money into utility stocks yielding 7 percent, and offering the prospects for capital gains and dividend increases, you could be receiving an additional $10,000. You can make your life more pleasant with that additional income or you can stock it away for your heirs.

There's another way to handle a home if you need cash. Sell your home to a family member who will rent it back to you. You finance the deal and receive a market mortgage rate from the buyer. Each month you'll receive a payment on the mortgage and you write your relative a rent check, which should be less than the payment you receive.

Another simple approach to home ownership is selling your home, investing the profit and renting an apartment. The rent may increase over a period of time, but the home repairs will be handled and paid for by the landlord.

Realtor Morton is the past president of the Los Altos Board of Realtors and a past director of California Association of Realtors. With all his experience in real estate, he understands the transition seniors go through when they have to move from one lifestyle to another.

For more information, call Morton at 941-7000 or 967-5020.