When approaching or reaching retirement it is common for homeowners to sell their current home to accomplish one or more of the following objectives:
- Purchase a smaller and/or less expensive home
- Relocate to live closer to family and friends
- Relocate to a retirement community
OLD STRATEGY
Sell the current home and use the the proceeds from the sale to pay cash for the new home. No mortgage and no mortgage payment on the new home.
For example, the homeowner sells the current home and receives $300,000 after expenses and paying off the mortgage balance (if any). They then purchase a new home for $300,000, or less, for cash.
The old strategy has two limitations. First, the homeowner is limited on the purchase of the new home by the amount of cash they receive from the sale of the old home. Therefore, if the new home costs more than the cash they received (in the example above, $300,000) they will need to come up with additional cash or they will need to get a mortgage and make monthly mortgage payments . The homeowner may not have additional cash and may not want, or be able to afford, monthly mortgage payments. This means relocating/downsizing may not be feasible if the new property is going to cost more than the old property.
The other limitation of the old strategy is that in today’s real estate market the homeowner will most likely use all the cash proceeds which will then be tied up in the new home. Once used to purchase the house it is difficult to access this equity in the future without incurring substantial fees, a monthly mortgage payment, and the need to qualify for a mortgage or line of credit. Even if the homeowner is able to spend less than $300,000 on the new home they will still tie up more money in the new house than required in the new strategy outlined below.
NEW STRATEGY
Sell the current home for $300,000 and obtain a Home Equity Conversion Mortgage. This mortgage (sometimes referred to as a reverse mortgage) is guaranteed by the Federal Housing Authority (FHA) which is a part of the U.S. Department of Housing and Urban Development (HUD).
Option One
Purchase a new home for $300,000. Use $150,000 from the sale of the current home and get a Home Equity Conversion Mortgage of $150,000 (These numbers are an illustration. The amount available on a reverse mortgage will depend on the age of the homeowner, the value of the property and current interest rates. The amount available on a reverse mortgage generally ranges from 35% to 65% of the value of the property).
The Home Equity Conversion Mortgage does not require monthly payments for principal and interest is not required to be paid off until the homeowner moves and/or sells the property (the homeowner can make payments at any time if they choose). Under the illustration for option one the owner retains $150,000 in cash that they can use for other purposes or keep in reserve.
Option Two
Combine $300,000 cash received from the sale of the current home with a Home Equity Conversion Mortgage of $200,000 to purchase a new home for $500,000. The Home Equity Conversion Mortgage does not require monthly payments for principal and interest and is not required to be paid off until the homeowner moves and/or sells the property (the homeowner can make payments at any time if they choose).
With option two the homeowner is able to use the proceeds to acquire a more expensive house if necessary or desired without having to assume a monthly mortgage payment.
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The strategy outlined above allows the homeowner to more effectively utilize their equity in the following ways:
- Invest cash to increase their income and overall wealth
- Use excess cash to pay for home improvements, create an emergency fund, consolidate debt or plan for medical or long term care expenses
- Purchaese a more expensive home without having to make montly mortgage payments.
In order to be eligible to take advantage of the opportunities presented by Home Equity Conversion Mortgaes at least one of the homeowner must be 62 or older (if married) and the house must be the primary residence. The options outlined above are only one feature of a Home Equity Conversion Mortgage-there are many other benefits and planning opportunities that they can provide. Find out if they you or a family member or friend could benefit from a Home Equity Conversion Mortgage by calling Wayne Tucker at 303-468-1985 or emailing him at wtucker@spectramortgage.com
