Rent or Buy in Retirement?

Whether your house has become an empty nest or otherwise no longer fits your needs and you decide to move, what will your next step be? Should you rent or buy?

So much depends on your financial situation, how sure you are about your next move, and whether you aim to make just one major housing change for the long run.

Mortgage interest rates for a 30-year fixed mortgage hit 7.79% last October, according to Freddie Mac, and have kept many home owners in their homes and buyers on the sidelines.

Rates have begun to come down, with the average 30-year fixed-rate mortgage at 6.21% recently. Mortgage rates had already started to decline over the summer, and even with the Federal Reserve cutting short-term rates by 50 basis points (half a percentage point) in September, mortgage rates are unlikely to drop further quickly, so, what is the best housing move for people aged 50 and over?

If they want to relocate, should they rent for a while in hopes rates will come down and they can reevaluate?

Whether to rent or buy depends on your overall financial picture, whether you are relocating to a different state or region, and your health. "It's an individual decision based on multiple factors," said Wendy Banner, an associate broker with Long & Foster Real Estate in Bethesda, Maryland. "If you are unfamiliar with the area, you may want to rent first."

Every situation is unique.

Karin Schiffman, 73, initially rented when she relocated from suburban Maryland to Miami to be near her son, daughter-in-law and grandchildren, 1 and 5 years old. "I rented there because I knew nothing about Miami," said Schiffman, who has been divorced since 2007.

She was downsizing from a 10,000-square-foot home, and decided to rent a condominium to see if that option was right for her. It meant being flexible for the unforeseen future. "I didn't even think of buying," she said.

She even rented a furnished condo. "I didn't want any of my stuff," she said. "I gave it away or left it for the new owners."

If you're not sure about where you want to be, it's typically better to rent.

"Renting allows tremendous flexibility," said Mark Hamrick, Washington bureau chief and senior economic analyst for Bankrate. "The downside is you are not building any equity, rent increases, and there is no tax benefit to renting."

When her family told her they were moving back to the Maryland suburbs three-and-a-half years after she had arrived in Florida, she re-evaluated her thoughts about buying vs. renting.

After returning to Maryland, she decided to buy a home again. This time, she found a 2,600-square-foot four-bedroom house 12 minutes' drive from the children, and moved in at the end of the summer. "It's perfect for me," she said.

Schiffman consulted with her investment adviser before deciding whether to buy with all cash, using some of the proceeds from the sale of her long-time home. "I stretched to buy this," she said. "I paid cash. I was able to do that."

Her outlook for the future? "If worse comes to worst, I'll sell the house," she said. For now, she is busy having the house painted and figuring out additional furnishings she may need.

"I am happy not to have a house payment or a rent payment," she said. Of the previous long-term home she owned, she said, "It was a boatload to take care of."

Beyond mortgage interest rates for those considering whether to buy or rent when they move, there is for some people the emotional importance of home ownership.

"I just feel, myself, having been a homeowner, I was living in someone else's condo," Schiffman said. "I just never felt like it was my home. I was just living someplace temporarily."

In addition, when you rent from an owner, you never know if they are going to want to come back in to live in the space again, or raise the rent more than is comfortable for you.

Yet not everyone can afford to buy at this time in their lives and others just prefer to rent indefinitely. Some choose to use cash from the sale of their home to buy a different property. "Buying a home isn't just the mortgage payment," said Hamrick.

"Housing affordability is out of reach for many prospective buyers," he said. "Look into your ability to afford one over the long term." If you decide to take out a mortgage, Hamrick recommends a fixed-rate loan rather than one with an adjustable rate.

In contrast, as a homeowner — whether you own a single-family home, townhouse or condominium — you'll have to pay property tax, insurance and possibly common charges, such as a homeowners association fee. Owning also means transaction costs such as real estate commissions and, if you are obtaining a mortgage, a down payment, which could be as much as 20% of the purchase price.

It is typically easier to obtain a mortgage if you still have regular income; without regular income, regardless of your finances, it will be harder to qualify, though possible.

With changes in the way real estate commissions are paid, ask detailed questions as a buyer about what your financial obligation will be to your broker. When you sign a buyer agency agreement, you, as the buyer, may be responsible for that part of the commission, said Trish Gesswein, director of brokerage operations for Houwzer, a real-estate agency in Philadelphia.

Ask the buyer's agent if the seller is offering a commission to the buyer's agent. If not, before you sign anything, ask what percent of the commission you would be required to pay.

In addition, a key question is: What is the best sequence if you are selling a home and want to buy a different one immediately? Should you sell before you buy? It depends on whether you can find a lender that will offer you bridge financing or if you have other assets that you can use, Banner said.

Ideally, if you are looking to buy a place and have additional assets, you can begin looking in the new location. It'll be easier if you know it well, and have contacts in the area who can make referrals to real estate agents.

Before you make one or two trips to the new area, for example, you can research a lot online.

Many people cannot afford to pay for two places at once, so it can be best to sell your home and rent temporarily in your target location, so you can take your time in finding a new home that you really love, Banner said. Determine, to the extent you can, the reputation of any neighborhood or building you are considering.

Before moving, it's important to factor in the emotional component.

"If you're unsure, don't go into a purchase contract," said gerontologist Mary Kay Buysse, co-executive director of the National Association of Senior & Specialty Move Managers in Hinsdale, Illinois. "Take one or two years to figure out what you do want."

People who buy "know exactly what they want it to be," she said. "They might not find that right away." They rent temporarily, as Schiffman did.

Harriet Edleson is author of the book, “12 Ways to Retire on Less: Planning an Affordable Future” (Rowman & Littlefield). A former staff writer/editor/producer for AARP, she has written for The New York Times, The Washington Post and Kiplinger's Retirement Report. Read More