Trim the Fat Off of Your Mortgage and Take Advantage of the Lowest Rates in History

Now may be the BEST time to downsize and sell that BIG home of yours.

If you are anything like my baby-boomer parents, then you have done fairly well over the past 2-3 decades. You probably have built up a considerable amount of wealth over the years and now live in a house that is well beyond your means. The decade of the 90’s brought in the “McMansion” as a pop cultural reference, and it is very apparent that this term had been born of financial exuberance, extension of debt and credit, and lifestyles that had spiraled out of control far beyond the scope of sustainability. Millions of people moved up and up throughout these years and found themselves in a home that was much larger than they needed, yet it was a reflection of wealth in a society where keeping up with the Joneses was (and still is) a high priority for many. Today however, a presence of humbleness exists. Concepts of sustainability, retirement planning and financial conservatism are hot topics in the group of soon-to-be-retired baby boomers. You can feel that there is a sense of insecurity for the future and the disbelief in the ability for the government to help each of us out individually as the government has larger, more systemic problems to solve.

If you haven’t done so already, now would be the time to take action and start making strides to a better future. The McMansions that many aging baby boomers find themselves in are way too much to handle, but they find that the idea of change (and the resistance to it) is causing a systematic failure to see the bigger picture and are hurting themselves as a result of it.

Assuming that you don’t own your home free and clear (only 30% of all homes are), you may have a mortgage that has become more and more ominous as you have been getting older. Like many consumers in an equity rich environment from the late 1990’s to early 2000’s, you may have refinanced and cashed money out while extending your loan 30 more years, or changed the terms to an interest-only payment. This type of mortgage manipulation has come at a cost, and it was done during a time where the future looked so bright, that there was no conception of considering the alternative in case the market went to hell and a hand basket.

Today these mortgages are looking pretty scary. Some folks have paid down their mortgage over the past several years and have a manageable and declining mortgage payment, and they will soon own their home free and clear. However, this is not your typical homeowner. The typical homeowner faces a substantial mortgage payment continuing well into their golden years which is specifically a time when this kind of debt obligation should not be present. What’s more, the cost to run that big home of yours makes things even worse. Between the water, utilities, landscaping, pool and community maintenance costs, a typical homeowner has to factor in several hundred dollars more on top of the mortgage, taxes and insurance.
This immense amount of debt may force older homeowners to stay in the workforce in order to carry all of these housing expenses or they will be forced to sell their homes in order to downsize and limit the debt. It may also increasingly drive people of retirement age to locations where housing stock is less expensive. We are seeing all of these options in play today, but I will want to highlight one, namely downsizing your home today and why such an awesome opportunity exists.

The value of most homes in this country has been consistently declining over the past couple years as we have been witness to the worst financial meltdown in recent memory. While this was happening, consumer confidence and buyer activity plunged and home sales at all price points have been sluggish at best. Additionally, higher end home sales during this period have been almost completely nonexistent. This lack of demand created further downward pressure on prices and from 2006 to late 2009 we saw a very ugly market. To make matters even worse, trying to get a jumbo loan (anything over $417,000) financed in this environment meant an alarmingly high rate in the 7-8% range. A buyer’s only saving grace was to finance using an ARM (Adjustable Rate Mortgage) at a rate in the mid 6% range – but not too many people were stoked to finance using ARM’s given the preponderance of bad press this financial vehicle has received, and the inability to predict where rates would be when it came time to adjust 5 years later.

Flash to today. Consumer confidence is certainly off of its lows and slowly improving, and the same goes for market activity in terms of the amount of homebuyers in the marketplace. It is looking good, and although (for the high end of the market) we aren’t out of the woods just yet, nothing compares to how bad things were for high end real estate sales during the past 3 years.

Specifically, the issue to take away is this: mortgage rates today are the best they have been since they started tracking rates 40+ years ago. Between the geo-political problems facing America and Europe, and the overall ill-health of several international economies around the world, most banks and their prevailing interest rates have nothing other to do right now than to keep rates as low as possible. Any rise in rates right now could drive us right back into recession. In and of itself, these low rates are helping the real estate market from the recent drop in buyer interest since the government tax credits expired in April, however, those who own a home that is higher than $500,000 in value are able to sell their home today to a larger pool of potential buyers because more buyers can afford a higher mortgage due to the rates being so low, and the cost of money to buy that home is less today than it ever has been.

As previously mentioned, there is a decent level of activity at the high end of the market compared to just a year or two prior. A typical home buyer today looking to buy a high-end home can realize a loan to finance that property at about 4.5%! This is a 30 year loan and not an Adjustable Rate Mortgage. That is a HUGE difference from just a year or two prior where the going rate for this type of mortgage around 2 points higher. This kind of savings and window of opportunity will get the buyers moving, and the rebounding economy has helped to get them interested in the marketplace again to do just that. These low rates are the key to spurring interest, and they are also the key for many baby boomers in oversized homes to take advantage of this market opportunity and sell now before the opportunity passes by.

Just consider how much different your cash flow and wealth would be and how much more you could allocate towards your retirement if you could “shed” half of your stuff and make the move into a more modest abode that’s considerably smaller than the size of your big home now? Could you do it? If you have a hard time even fathoming the vision, then this kind of strategic planning is probably perfect for you to act on. You need not even buy into a new home immediately. I have advised several clients to find a nice rental to live in and give plenty of time to get used to a more modest lifestyle and work their way into getting a smaller home to purchase. The savings in mortgage costs in addition to the savings on general maintenance costs for some will be in the thousands of dollars each month. That’s A LOT of money that you are draining away each month and your future self could probably use that money!

If I have gotten your attention, my last suggestion would be where to go next. My answer would be for baby boomers that are set on downsizing to consider a 55+ community. Save the growls, I know how you probably just reacted to that statement, but hear me out. I remember growing up and seeing the 55+ communities full of old grumpy people that yell at cars going too fast and have gravel for their lawns. Certainly there is an enormous stigma to these kinds of communities, but that’s what’s so perfect about what I am about to tell you. The value in these kinds of communities is so tremendous that it will force a changing of the guard for many of these places, and the older people of yesteryear will be replaced by younger, hipper baby boomers. This is not prediction. This is a guarantee because it is beginning to happen already. When considering the choices out there to downsize into, we are in the stage of “trendsetters” when it comes to people considering and moving into these communities. It will soon become a trend and shortly the norm after that. The reason is because of the cost. 55+ homes are always less expensive than standard home in the same area. There’s no difference other than the fact that the ownership is restricted to at least one of the owner’s being 55 or older. Some communities even allow children living in the home as well, but it depends from place to place. I have had clients do exactly what I am suggesting, and the homes they are buying are anywhere from 20-35% less in price that a comparable home in the same area that’s not a 55+ community. It won’t take long for many to see the value and get over the stigma of the community because it is going to be cool; the “thing” to do soon. So you might as well be ahead of the game and consider this strategy today of selling your higher-end home and taking advantage of the amazing loan rates for the market, in addition to joining an inevitable trend at the bottom floor by downsizing and buying into a 55+ community.

Not only does this strategy help you on the way out of your current home by making it more sellable, the move into a less expensive, more modest home will truly frame your lifestyle for a great retirement tomorrow by saving thousands today.