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There is nothing wrong with choosing to live in the house you have now once you retire. But a lot of couples find that a family home feels empty once their children fly the nest. If that’s the case, you can downsize and find a property that’s just right for your needs. You might also want a complete change of scenery, like something that is closer to nature.
After figuring out what you want your future home to look like, the next step is to determine how you’re going to fund it. There are a number of ways to finance your dream home for retirement, and these three are the most practical:
1. Open a high-yield savings account
Saving for a retirement property is just like saving for any major purchase. Look around for accounts with high annual percentage rates, which is actually an advantage when it comes to savings. Though they require higher deposits, the returns are much healthier.
One option is a certificate of deposit (CD) that comes with fixed term lengths. These range from a few days to several years. The catch is that you can’t withdraw from a CD until it reaches maturity, or else you will have to pay a penalty.
However, this can also play to your advantage. The fixed rates can be easily computed with a CD calculator. Knowing how much interest you will earn on your savings over a specific period of time means you can get a better sense of your finances in the future. Due to the fund essentially being untouchable unless you want to get penalized, you can guarantee the amount of savings you will have several years from now. This can also help you narrow down your options for a future home and make the process much more straightforward.
2. Make smart investments
Investing, however, is another option for growing your personal wealth. Compared to saving the traditional way, you need to be willing to take some calculated risks that can potentially pay off.
One way to minimize those risks is to follow the golden rule of investing by diversifying your portfolio. Simply put, it means investing in different instruments so that you don’t lose all of your capital if conditions become unfavorable. For instance, you can allocate a quarter of your total investment capital into stocks, bonds, mutual funds, and real estate investment trusts. If the stock market crashes, you might still be able to protect 75% of your capital because of diversification.
However, diversification — and investment in general — requires expertise. It’s best to consult an investment advisor until you’re ready to take risks on your own. If you make wise decisions, with any luck you’ll be able to purchase your dream home later down the line.
3. Use the equity in your home
The third option is to take out a home equity loan, which is available to people who already have a home. This basically allows you to borrow against the value of your current home minus the money you still owe on your mortgage. You can use the lump sum loan to fund another home purchase, which is why it’s often referred to as a second mortgage.
Keep in mind that this type of loan only allows you to borrow up to 85% of your home equity. If you’re looking to upgrade, the most you can do with a home equity loan is to fund a down payment for a new house. This is more ideal for people who are downsizing their property.
Buying a retirement home so early has more drawbacks than benefits, so it’s better to take your time. The advantage of these three options is that there is no rush for you to make a decision. In fact, time is on your side when it comes to savings, investments, and home equity. So, start the financial planning now, and make major life decisions later.