Older Americans have new options to downsize and buy new home.
Many Americans over the age of 50 want to downsize because their children are grown up or moved away and they don’t need the same amount of space they’ve had for several years. Maybe they prefer to relocate to escape the cold winters or to move somewhere close to family.
But no one wants to spend all of the proceeds from a home sale to move, right?
There is an option that many don’t even realize exists: HECM For Purchase, which allows you to stash more money from the sale away for your retirement.
It’s the fastest-growing version of a reverse mortgage, says Paul Fiore, an executive vice president for AAG, a reverse mortgage company. Yet, it’s still relatively unknown.
“The idea of seniors being able to downsize, and utilize a reverse mortgage as a tool to help them accomplish that, is a great strategy, but the problem seems to be that it’s going to take some heavy lifting to get that message out there more,” Fiore says. “We have seen increases in the last couple of years, but there’s a tremendous amount of more opportunity to grow that market. It’s educating realtors, because they’re that first line of defense, and making them understand how the HECM works and how it works as a purchase. They are so used to traditional lending side that they [often] don’t consider a reverse mortgage for the purchase.”
Here’s how it works: Let’s say a couple has a home that’s paid for, or mostly paid for, that’s worth $500,000. If they sold it and got a new home for $300,000, they may put down $200,000 and use $100,000 of the purchase price in a HECM For Purchase. That would leave them $300,000 left to invest in the stock market for their retirement plans.
If they drew only 4 percent a year, that means an extra $12,000 a year plus their Social Security and other investment income that they have.
“It’s a great strategy for the right situation, where someone with significant equity in their current home wants to downsize,” Fiore says. “They can put away a significant amount of money for retirement.”
Fiore says it functions like a traditional HECM, and 95 percent of people would take out a fixed-rate reverse mortgage. They would be responsible only for the taxes and insurance, and wouldn’t have to make a house payment. It wouldn’t be paid back until they die or move out.
“What a lot of seniors do is use it to fund retirement for years to come, especially people who have experienced pension reductions and 401(k) hits in the past,” Fiore says. “A lot of times they don’t have a 15-year or 20-year runway in money that they need when they’re retiring.”
Fiore uses his parents as an example. They’re considering selling their home in New York and moving to Southern California east of San Diego when they retire by the end of the year. They still owe a small amount on their home that they can sell for $600,000. They have to come up with only 40 percent of the proceeds for a new home in cash and can use the rest with a HECM For Purchase. The remainder will be invested.
“A lot of people from the Northeast and other cold weather climates who say, ‘I’ve been here 35 years and I’m done with winter,’ want to go to Florida or somewhere warm,” Fiore says. “They want to downsize because they’re empty-nesters, so they utilize HECM as a purchase product.”
Fiore says there are still plenty of older Americans who think they should take all of the proceeds from the sale and pay cash for the home because they don’t want to worry about a mortgage payment. They can be convinced not to do that once they realize there are other ways of avoiding the monthly house payment, he says.
“They don’t have to make a monthly payment and take away their ability to have that nest egg for their retirement years because they put it into a home,” Fiore says. “If they bought a $250,000 home with a reverse mortgage, they may only have to put $80,000 to $100,000 of it down, and they can put away the other $150,000 to $170,000.”