Are you looking around your cavernous single-family spread and thinking, “Do I need this much space?” Once your family has flown the nest, there’s probably little reason to still keep the nest.
Downsizing is a tried-and-true feature of retirement. As much as people maintain they want to “age in place,” many opt for less space. According to Demand Institute, a consumer demand research firm, 37 percent of baby boomers plan to move from their current home. Of those, 54 percent are planning to move into a smaller space. More than half say they intend to spend less money on their next home.
Moving into a condo can help you downsize and potentially save on your living expenses. Use this guide to help you make your decision.
The pros and cons of buying a condo
For many, the best feature of condo living is simplicity. Say goodbye to the mowing, raking and shoveling and say hello to the condo maintenance staff. With more people flocking to cities, a condo is also a good way to be close to the action. Some condos even boast spa-like perks such as pools and fitness centers.
And condos may offer much more security than a single-family home. After all, thieves have a much harder time gaining access to a unit secured by surveillance cameras and sophisticated access control systems. What’s more, with more of your neighbors close by, they’ll be better able to keep a watchful eye on your place.
But condos have their downsides, as well. The same de facto squad that acts as a neighborhood watch can prove a little too watchful. By living in much closer quarters, you can expect much less privacy than when you lived in a single-family home. You might enjoy a tight-knit community if you’re a people person. But those who like to keep to themselves might find it intrusive or invasive.
And don’t forget about the rules. Like Jerry’s Florida condo-dwelling parents on Seinfeld, you are likely to encounter a set of rules—lots of them—covering everything from noise levels to guests to pets to parking spaces. If you break one, you might get off with a warning. Repeat offenders could be subject to a fine. Unlike Jerry’s dad Morty in the classic television show, you don’t want to be seen as the condo troublemaker, so check the condo’s bylaws and make sure you can live with the rules before you start packing for your new life.
Opportunity to save
For many seniors, a condo is a chance to reduce their living expenses and stretch their retirement dollars.
According to Boston College’s Center for Retirement Research, moving from a home valued at $250,000 to one that’s just $150,000 can save you $3,250 annually — if you assume annual maintenance costs of 3.25 percent of home value. You could also be saving on utilities, insurance and property taxes by downsizing.
What’s more, assuming you’ll have $75,000 to invest after your sale, new home purchase and allowance for moving costs ($250,000 – $150,00 – $25,000 = $75,000), you could generate roughly $3,000 annually at an interest rate of 4 percent.
In a condo, you might be able to realize even more savings if you are no longer paying for lawn care, snow removal, or other landscaping-related maintenance costs.
Some costs might go up
However, a move to smaller digs doesn’t automatically equate to savings. For example, moving out of a home in the suburbs or a rural area into an urban condo that’s adjacent to popular attractions could wind up costing you more. You might also incur higher-than-expected moving and furnishing costs. If your new home has a different size and layout, you may need to buy new furniture or pay to store things that don’t fit into your new home.
Your property taxes also could go up, especially if you’re unable to transfer your property tax basis from your old home to your new one. Therefore, it’s very important to understand these transfer rules as they apply to your particular state and county before deciding to downsize.
In addition, condos typically charge monthly dues for the upkeep of common areas. In complexes with few amenities, this might run a few hundred dollars a month. Luxury condos, however, may charge considerably more. Additionally, there might be “special assessments” from time to time if your condo complex is in need of capital improvements, such as fixing a roof, replacing a boiler or even repaving the streets.
Financing your condo purchase
Like many retirees and pre-retirees, you may have a lot of equity built up in your home. Downsizing allows you to unlock a portion of it and generate additional retirement income by investing your net proceeds.
Although many people are unaware of it, one way to finance a condo that provides a lot of financial flexibility for your retirement is to purchase it with a reverse mortgage. The way this works is, you come in with a down payment, using some of the proceeds from the sale of your previous home (you can also use other savings or assets if you like) and your lender provides the rest to make up the full purchase price. But unlike a traditional mortgage that you soon have to begin paying back after your loan closes, you don’t have to repay your reverse mortgage loan until you leave your home. Although you don’t have monthly mortgage payments, you are still responsible for the payment of property taxes, homeowners insurance and the upkeep of the home. This purchase strategy allows you to free up more of your money for investments, income generation or simply to live more comfortably.
To qualify for a reverse mortgage or a reverse mortgage for purchase, you must be 62 or older, own and live in your home as your primary residence, have sufficient home equity, and undergo counseling and a financial assessment to ensure that you understand how the loan works as well your obligations under the loan.
You can even use a reverse mortgage for purchase to buy a high-value condo in cases where your loan size would exceed $726,525, which is the FHA’s current loan limit for a traditional reverse mortgage, also known as a Home Equity Conversion Mortgage (HECM). This larger-limit loan is known as a jumbo or proprietary reverse mortgage loan.
Here’s how this larger-loan scenario might work using the AAG Advantage jumbo reverse mortgage for purchase. For illustration purposes only, let’s say, you’re 70 years old and you recently sold your home for $2 million that you owned free and clear (no mortgage). To purchase a waterfront condo for $1.5 million, your down payment would be $876,925 and AAG’s loan would be $634,500 to complete the $1.5 million purchase price. This example is based on closing costs of $11,425.
Purchasing your condo this way would leave you with roughly a million dollars from your original $2 million sale and a new condo on which you have no monthly mortgage payments. You will still be responsible, however, for the payment of your property taxes, homeowners insurance and the upkeep of the property, along with the repayment of the loan when you leave the home.
Is a condo the right move for you?
Given the potential for greater affordability, a more desirable location and increased amenities, not to mention reduced upkeep, transitioning to a condo may prove an excellent move when you’re ready to downsize. But it’s not without some compromises, including the possibility of less privacy and more rules and regulations. Given these trade-offs, create your own list of pros and cons to help give you the clarity and certainty you need for deciding whether there is a condo move in your future.
If you decide that a condo is that right move, be sure to explore all your financing options including a reverse mortgage, or a jumbo reverse mortgage for the purchase of a higher-end property.
Downsizing to upsize your lifestyle, it’s definitely a choice worth exploring!