If you are 62 or older and in the market to purchase a new home or are thinking about buying a new home, you may want to consider using a reverse mortgage. There are six common scenarios senior home buyers may find themselves in when buying a new home. A reverse mortgage may be a better solution than your current purchasing plan.
Increase Your Purchasing Power
Many seniors want to avoid having a mortgage payment when purchasing a new home. Therefore they end up being constrained by the amount of cash they received from the sale of their home. Because of this, they may or may not find a home they want in that price range. Or they may end up having to “settle” for something they don’t really love.
Imagine you just sold your home and you netted $200,000 from the sale. With a reverse mortgage you could double, or more, your purchase price. In other words, you could look at homes priced between $200,000 all the way up to $400,000. As you can imagine, this increases the likelihood of finding the perfect home because there are more houses for you to consider. Plus there are no monthly payments.
Retain Cash From The Sale Of Your Home
Because seniors, in most cases, want to avoid mortgage payments on the new home they buy, they end up using all, or most of, the cash from the sale of their home to purchase their new home. The biggest problem with this is that they tie up all of that cash in the home’s equity. What most people do not consider is that home equity is not liquid. The only way you can gain access to it is by borrowing against it or selling the home.
Imagine you just sold you home and you netted $200,000 from the sale of the home. While the home was on the market, you found the perfect home to downsize in. The good news is that it is for sale for $200,000.
You have two options to consider, pay cash or get a reverse mortgage to purchase the home.
If you pay cash, all of that $200,000 is locked up in your home’s equity.
Or you could get a reverse mortgage to purchase the home. With this option you only need to put down $100,000 or less. You can retain the rest of the cash from the sale and put it in the bank, invest it, vacation more or do anything else you wish with the cash. And there are no monthly payments.
This scenario could get even better. The interest you earn from the $100,000 by investing it could generate enough interest to pay your taxes and insurance; which could free up additional cash flow on a monthly basis.
Retain Your Retirement Assets
Once again, due to seniors desire to avoid having a monthly mortgage payment; they may often times pull money out of retirement in order to purchase the home they want. There are several consequences to this decision that seniors need to take into consideration.
Tax Consequences – More than likely there will be tax consequences to pulling money out of retirement accounts. In order to net the actual cash needed, more money may need to be withdrawn in order to cover the taxes that may need to be paid. Your financial advisor and CPA can help determine the ramifications of this decision.
Liquid Reserves Become Illiquid – You will be tying up liquid assets that are relatively easy to get access to into your home’s equity. As was already mentioned, the only way to gain access to your home’s equity is through a loan or the sale of your home. Secondly, you need to take into consideration that you are giving up future growth of those funds had you left them as investments.
Impact of Retirement Success Rates – By withdrawing funds from your retirement account you may be causing the success rates of your retirement to decline significantly. Before withdrawing funds from retirement you should consult with your advisor to see and understand the impact this may have on you during retirement.
The alternative to using retirement funds to purchase a home would be a reverse mortgage.
Imagine you just sold your home and you netted $150,000. The home you want to buy is $250,000. Instead of pulling $100,000 out of your retirement accounts, plus whatever additional amounts you may need to cover the taxes, you could just use a reverse mortgage.
In this scenario, you would only need $125,000 down or less depending on your age. You get to leave the $100,000 in your retirement account. Plus you could keep the remaining amount from the sale of your home in the bank or put it into retirement. Your money can continue to grow versus it being tied up in your equity and you have no monthly mortgage payments.
Moving Can Become A Reality
Often seniors in Oregon can feel trapped in their homes. They want to sell or move, but can’t figure out how to make it work for them. This is because they either do not want or cannot afford a monthly mortgage payment to buy the home in Bend they want or need.
Imagine you want to move to be closer to your family and grandchildren. However, the city in Oregon where they live, you can’t afford to pay cash for a home there, nor can you afford the monthly payment. Because of this you feel trapped in your current home.
Let’s assume that in order to be able to move near your family, you are going to need to spend $300,000 to purchase a home. If you could net roughly $160,000 from the sale of your home, you could then use a reverse mortgage to purchase a home close to your family. Your dream of moving could become a reality.
Free Up Monthly Cash Flow
Imagine you did not know you could purchase a home with a reverse mortgage. You end up buying the dream home you have always wanted. Unfortunately, you did not net enough from the sale of your home and you ended up getting a traditional forward mortgage.
You decide to go with the traditional 30 year fixed rate mortgage. Given the amount of money you needed to borrow and the interest rates at the time, you end up with an $850 a month payment. You payment does not include taxes or insurance.
The $850 is a bit of stretch financially, but you decide that it is worth it in order to get the home you have always dreamed of owning. Unfortunately, that monthly payment has you financially strapped. You are unable to do more and have as much fun as you could have during your retirement.
If you had used a reverse mortgage, your situation could have been significantly different. You may have been able to purchase that dream home, yet you would have been able to free up $850 a month in cash flow. Plus, you may have been able to retain some of the cash from the sale of your home. Do you think your retirement might be a little more comfortable, enjoyable and more fun with an extra $850 a month in your pocket?
Create A Line Of Credit
One of the most amazing features of a reverse mortgage is the line of credit. The un-used portion of the line of credit actually grows in value. It grows at the current interest rate plus 1.25%. It is similar to earning interest but it increases the availability of funds in the credit line.
Imagine you are 62. You just sold your home and netted $300,000 from the sale. You find the home you want to buy and it is priced at $300,000. You could easily pay cash or you could purchase it with a reverse mortgage.
If you purchased it with a reverse mortgage, you would put the $300,000 down and then finance the closing costs. You could pay for your closing costs out of pocket as well. You just need to have a $500 balance on the line of credit.
There are several reasons why you would want to consider this option.
One Set of Closing Costs – Instead of paying cash and then getting a reverse mortgage, you are doing it all in one transaction which can save you thousands of dollars in duplicate closing costs.
Liquidity – The line of credit creates liquidity in the home. The line of credit is always available as long as you are still living in the home and your taxes and insurance are up to date. Think of it as an insurance policy. You may never need to use the line of credit, but you are glad you have it when you do need it.
Things Could Change – Nobody can predict the future. There are a variety of things that could happen that may prevent you from qualifying for a reverse mortgage at some time in the future. This could include credit issues, income problems, program guideline changes, falling home prices or the loan may no longer be available.
Hedge Against Falling Home Prices – Everyone felt the pain of the housing bubble. Housing prices in Oregon peaked in 2007 and the median housing price in Oregon is expected to hit the 2007 highs in spring of 2016. It has taken almost 9 years to recover. The line of credit is not affected by the real estate market. In other words, the availability of funds in your line of credit continues to grow even if home prices are falling. The lien of credit creates a hedge against falling prices and could put you in a stronger financial position.
The FHA reverse mortgage has made significant changes over the years to make this a strong, safe and viable option for seniors. There are still plenty of misunderstandings, myths and poor journalism surrounding the loan product. It is highly encouraged to educate yourself and speak with a professional in order to get informed and empowered to make the right decision for you.