Q: I am a divorced, self-employed 56-year-old. I own a home with at least $350,000 in equity even in this slow market, and I have $100,000 in savings and zero debt. But I'm the definition of house poor: All my disposable income goes into maintaining my property. The cost of living is so high in my area that a decent income still leaves me with little left over. There's got to be a smart way to leverage my assets. How do I summon the courage to make the bold move of moving to the country?
A: I'm thrilled that you have no debt, and your home equity is a great asset. But be aware that only the first $250,000 in capital gains from a home sale is tax-free ($500,000 for couples). Earnings beyond $250,000 will be subject to a federal capital gains tax of up to 15 percent. Additionally, the home must be your primary residence, and you can claim the full exclusion only if you lived in it for at least two of the past five years. So you need to calculate what your net after-tax profit would be from selling, then figure out the price of living in the country. Remember, even dream houses come with utilities and property taxes, so be sure your move would sharply reduce your monthly living costs.
So often we approach decisions as all or nothing. How about a little of both? Can you move and continue to work with your current clients? That's important because your $100,000 isn't enough for a comfortable retirement. I want you to make it a goal to put away at least $10,000 a year until you're 65. With those savings plus what you've already got, you could have a $350,000 nest egg by the time you're 65. That's a decent sum, and Social Security should provide more income.
Q: When we moved into our neighborhood in Detroit, it was a nice working-class area—a safe place to raise our kids. Now they're grown, my husband and I are both 64 and retired, and the neighborhood has gone downhill. We own the home outright and aren't sure what to do next. Buy a new house and rent out our current one? We wouldn't get much for it. Are we better off staying put?
A: Sometimes moving on is the only way to move forward. I can imagine your frustration watching the place where your kids grew up unravel over the years. But the only reason to stay put would be that you think the area will have a renaissance. Let's hope so! Right now, though, you have to step back and assess the facts. If there are lots of foreclosures around, you're likely looking at years, not months, before prices climb back to a level where you can sell at a profit; it will take time for the backlog of bank-owned foreclosed homes to be put on the market and then sold. As for the renting option: Do you think, considering the neighborhood's current state, you can attract responsible tenants who would pay enough to cover your property tax and maintenance charges? Even if you could, do you really want to be a landlord? Don't forget you'd still have to deal with the upkeep of the home. Getting "not much" today—even if that means downsizing to a smaller place in a better area—may well be worth the freedom from waiting and hoping for a turnaround.
Paying for Repairs
Q: I'm retired and would like to downsize, but my home needs repairs. Should I get a reverse mortgage to fix it up?
A: Absolutely not. A reverse mortgage is far too expensive to make sense for you. Up-front fees can eat up nearly 10 percent of the mortgage amount, and while a new type of reverse mortgage insured by the FHA reduces those fees, the ongoing insurance costs embedded in reverse mortgages make them a poor choice for a short-term loan. (To learn more, visit ReverseMortgage.org.)
A real estate agent who has experience marketing fixer-uppers can explain your options. Depending on your market and the repairs your house needs, you may be better off selling it as is. At the very least, an agent can tell you what repairs to focus on to make your home salable at a solid price.
If you do decide to take on the repairs, and your intention is to get the work done and sell shortly thereafter, a home equity line of credit (HELOC) could be your best move—if you're careful. First, don't borrow more than 20 percent of your home's value. Second, know that even if you qualify for a low interest rate—which is likely if you have all or most of your mortgage paid off—HELOC interest rates are variable, meaning they rise and fall. So use a HELOC only if your intention is to sell within a year; I don't anticipate rates will rise dramatically in the short term.
Keep Reading: How to save for home fix-ups
Dealing with Foreclosure
Q: My husband and I purchased our first home by taking out two mortgages on it. Within six months, the house went into foreclosure because we couldn't cover the larger mortgage. We have negotiated with the lender of the smaller loan to pay back the principal with a 3 percent interest rate over 10 years. It sickens me to think that we're paying off a house we no longer own. I'm wondering if we should declare bankruptcy. What's your opinion?
A: I think it's important—and fair—that you repay the small loan. You signed those documents in good faith, so it's only right that you take responsibility for what you borrowed. The fact that the lender is charging you 3 percent interest sounds like you're being given an opportunity to make good. Bankruptcy is a very serious process that's meant to address situations in which individuals have no way of meeting their obligations—it isn't an out for when you don't feel like paying up. Besides, bankruptcy laws were tightened in 2005; even if you did file, chances are you would be pushed into Chapter 13, and a judge would probably require you to follow a repayment plan.
The other thing you need to think about is your credit profile. You say that your goal is to eventually buy another home, which you will no doubt need to finance with a mortgage. While the foreclosure on the primary loan is going to remain on your credit report for up to seven years, at least you won't have two of them on your record. Bankruptcy stays on your report up to 10 years. There's no formula for determining exactly how much each ding hurts your record, but bankruptcy is worse than foreclosure. Any lender willing to take a risk on you after you've gone bankrupt is going to charge a much higher interest rate than it would for someone with a solid credit score. Finishing off that loan is the best thing you can do to show future lenders that you can be trusted.
Keep Reading: Why foreclosure is not always the best way to start over
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