Buying a retirement home: What you need to know

Retirement is an exciting new chapter in life that takes the focus off your career and shines it onto you. These golden years can feel like a new adventure—and only you decide what comes next. So, where to start?

Perhaps your vision of retirement always has included a specific destination, and you've considered buying a retirement home. Getting closer to family, living abroad or perhaps doing the classic move to sunny Florida—wherever you picture yourself living, a change of scenery can be nice.

Whether you'd like to sell your current house (or allow your lease to expire) and move to a new place entirely, or you'd prefer to keep your current residence and invest in a vacation home, it's a good idea to get the facts before making such a major purchase.

Moving to a new place offers the exciting chance to start fresh and put down new roots. However, taking on a mortgage isn't a decision to take lightly, so it's best to carefully weigh the advantages and disadvantages.

Purchasing a property in retirement as your new full-time home offers some benefits, including being picky about the features you want and need, adjusting your housing budget and maybe even downsizing. If this appeals to you, settling down somewhere new could be a sound decision to help you:

• Achieve a dream. Even if your budget doesn't have room for your ultimate dream home, you can prioritize the essential features that matter to you the most. Do you want a one-story home with a garden out front? Are you looking to live in a warm climate? Do you prefer a gated community, or do you want some distance? If you find a home that checks certain boxes, and it's within your price range, you could lock down your desired retirement lifestyle for years to come.

• Have a predictable budget. Buying a home with a fixed-rate mortgage could add stability to your budget, especially if you are currently renting or have moved frequently in the past. It may be easier to plan for housing expenses if you know you'll make the same mortgage payment for the next 20 years.

• Go forth with downsizing. If your current home has a lot of spare room or if you've been living in a high-cost area only because it was convenient for work, moving could allow you to trim both unnecessary space and expenses. Keeping your housing costs manageable is especially important when you're on a fixed budget.

Buying a home isn't always possible, especially in today's market. It could drain a significant chunk of your retirement assets if you're not careful. Owning a home also constrains you to live in a particular place unless you have extra money to travel. If those limitations sound like deal-breakers, buying a new place may not be right for you.

• Weigh the affordability. In June 2022, the average rate for a 30-year mortgage climbed to 5.91%. Just a year before, it had been 3.18%. Inflation and market volatility are in play these days. It simply might not be financially possible to find something in your budget. It may help to use a mortgage calculator to estimate payments for homes at different price points. Be sure to factor in additional costs of homeownership such as taxes, insurance and upkeep.

• Consider your spending priorities. You may have one source of income or a few income streams, such as Social Security, a pension, annuities and 401(k) or other retirement distributions. Analyze how much of your income is needed for basic life expenses, such as food, utilities, transportation and health care. You might find that you'd rather spend your hard-earned retirement savings on something other than housing costs.

• Realize money will be tied up. A home isn't a liquid asset. A good chunk of your savings will be held as home equity. You won't have immediate access to that money the same as if it were in a savings account. That might be inconvenient if you need money in an emergency.

With these pros and cons in mind, reflect on whether buying a home would be a good fit for you or whether you'd be better off staying where you live now. Here are some questions to ask yourself:

• Do I want to settle down in one location, or would I rather keep my options open? If your dream is to travel the world or spend a few years living near each of your children or grandchildren in turn, you might prefer the flexibility of renting. But homeownership may be right for you if you've found a community you want to stay in long-term.

• Do I have a particular vision for my home's style or features? Buying a new home may appeal to you if you want to create something unique, such as a cozy library, a custom kitchen or a backyard urban farm.

• Am I financially ready to make a down payment (among other costs)? Your required down payment may be as little as 3% of the home's price, but anything less than 20% may require private mortgage insurance, which can cost as much as 2% of the loan per year.

• Do I want the responsibility of maintaining a home? When a light bulb burns out in the ceiling fixture or a faucet starts leaking, a homeowner can't just call maintenance. Keeping a home in good shape will make demands on your time and your bank account.

You might not be interested in moving out of your current home but still want to change things up. In that case—if you have the financial means—buying a vacation or second home that you live in for part of the year could be worthwhile.

A second home can add variety and flexibility to your life, and it's an asset you can leave to your heirs. Plus, there may be ways to recoup some of the costs if you put it to use when you aren't using it.

• Get the best of both worlds. A vacation home means variety. If you live in an area that experiences frigid winters, you can escape them in a vacation home situated in a sunny spot. A second home in a rural area gives you the option to get away from a bustling city and unwind—but to eventually return to the amenities of urban life. The choice is yours.

• Notch another asset. Having equity in a second home means you have another asset to pass down to your loved ones. If you dream that your children will inherit a home from you one day, purchasing property is a step toward making that happen. Vacation homes sometimes stay in families for decades, becoming a space for generations to enjoy.

• Use it as a rental property. You might find that you don't use your vacation home during certain months. This presents a great opportunity to rent it out when you're not around, which might help offset mortgage and maintenance costs. Real estate is considered one of the most lucrative investments a person can make.

Owning a vacation home means you likely have an additional mortgage and costs—even when you aren't living there. It also might require travel to get to it, which can lose its luster over time.

• Take on a second mortgage. Lenders will expect you to show you can afford a second home on top of your primary housing expenses. They may set the bar for your credit score even higher, require more money down or ask you to show a higher level of cash reserves. Sometimes that means you may not even qualify.

• Face dealing with maintenance. It could be challenging to arrange for cleaning and repairs of a second home that's in a different city or state. You may need to hire someone to check in on the property regularly, especially if you're renting it out.

• Realize the impractical realities. Depending on how your health and mobility vary during retirement—as well as your disposable travel budget—journeying to a vacation spot could end up being too challenging. If you can't ever visit the house, you could find yourself spending money on something you're not even using.

It's easy to get carried away shopping for a second home. Who doesn't want somewhere fabulous to go when they need a break? But it's important to think practically. Ask yourself these questions to help you decide whether a vacation home would be a positive addition or more trouble than it's worth:

• Do I have enough cash flow for two homes? A second home will make demands on your budget beyond the mortgage, including property taxes, homeowner's insurance, association fees and maintenance costs. You need to make sure that your financial health is strong before taking the plunge.

• Am I financially prepared in case the value goes up or down? If your home's value rises, you might find yourself owing more property taxes on it than you originally planned for. If its value falls, your net worth could take a hit. Be wary of anyone offering a vacation home as a failproof investment.

• Is using retirement funds to buy a second home the best use of my assets? You might prefer to invest your nest egg in stocks, bonds, annuities or other investments instead.

If you've given it some thought and you've decided you'd like to move forward with buying a home, select a location and start your search.

Because this home is where you'll spend all or a decent chunk of your sunset years, you should make sure you're keeping accessibility in mind for your body's aging physical needs. Are there steps or a ramp at the entrance? How many levels does it have? Pay attention to the floor layout to gauge if there's enough room to navigate with mobility aids, and check whether the cabinets and shelves are easily within your reach. You'll want to choose a home that still will be livable as you age.

Buying a retirement home is a big step, and there's a lot of information to absorb—from finances to logistics. But you don't have to do it alone. Connect with a financial advisor near you who can guide you through the homebuying process.