Are you thinking about downsizing your home? If so, let's take a look at the issues you may be facing by following Gail and Allen, who visit their financial advisor to discuss buying a smaller house when they retire. Their advisor points out some of the factors they should consider, such as whether they have enough cash for a down payment, whether they can afford home ownership during retirement when their income is lower, and the potential difficulty of getting a mortgage for the smaller home.

Gail and Allen love their historic Victorian home. It was a "dream-come-true" purchase made, for better or worse, right before the real estate bubble burst. But with its multiple floors and steep staircases, the house may not suit them in retirement. Both have health concerns that could affect their future mobility, and the upkeep is considerable.

Their advisor began by noting that it is good Gail and Allen didn't need to move right away, because the move isn't a slam dunk.

Now and later

First, they'd have to think through how a home purchase would affect them financially -- both immediately and in the long term.

Would they have enough cash for a down payment? They've yet to pay off their mortgage, and the couple was unclear on just how much equity their Victorian had lost. Lenders are typically asking for 20 percent up front, which has some retirees dipping into their savings. This money may be better off staying in their retirement funds to continue growing tax-deferred or, in the case of a Roth account, tax-free or being set aside for medical costs.

Second, will Gail and Allen be able to afford home ownership during retirement when their income is lower? Even a smaller home will require mortgage payments, maintenance expenses and property taxes. They could look into a condo, but these often feature newer amenities, as well as association fees, that can make them unexpectedly expensive. The couple might find it more economical to rent.

Other matters

Another issue is the potential difficulty of getting a mortgage for the smaller home. Although lenders are forbidden from discriminating against borrowers on the basis of age, the couple will face very strict lending requirements. They should expect to have their cash flow, debt load and credit history scrutinized.

On a more positive note, as homeowners, the couple could continue to enjoy certain tax breaks. These include the property tax deduction and the mortgage interest deduction.

This has been a general discussion of a potentially complex situation and is not intended as advice to anyone. Always discuss such decisions with qualified financial advisors.

Norm Grill is a certified public accountant and managing partner of Grill & Partners LLC, accountants and consultants to closely held companies and high-net-worth individuals, with offices in Fairfield and Greenwich. He can be reached at n.grill@GRILL1.com.