Downsizing – How to Keep Your Gold in Your Golden Years
Many seniors own their homes outright or with small outstanding mortgages, but these homes are now too large, have too much upkeep, or are too outdated. They may even have large yards that a senior can no longer take care of. These seniors still want to live independently in their own house, but know it is time to downsize to a smaller home or condominium.
Let’s look at 2 different scenarios of how this can be done. We will look at the traditional method following Jim and Diane and a new method following the story of Gary.
Traditional Method of Downsizing
Jim and Diane are in their early 70’s. They own a home where they have lived for 20 years and know that they no longer need the 2,700 square foot home. The 4 bedrooms and 2.5 baths along with the half acre yard was great when they were younger and had kids still at home, but is too much for them to clean and keep up. Plus, now that the home is over 30 years old, there is a good amount of maintenance that will be needed. They have decided it is time for them to downsize to a smaller home with a smaller yard.
- Monthly Payment
Average Mortgage Payment VS. Loan Amount
Jim and Diane have taken care of their housing situation, but they are still struggling financially on Jim’s retirement and their combined social security. They have no mortgage now, which is great, but other expenses like property taxes, healthcare, and other monthly living expenses take up most of their monthly budget leaving them with little left over to enjoy the benefits of living in San Diego or spending money on their grandkids. The equity from the sale of their home was going to be used to help with living expenses, but they had to use it all to buy their house. There has to be a better option… and there is!
New Method of Downsizing
Now, let’s look at the story of Gary. Gary is 69 and owned a home for 30 years in a part of San Diego that had appreciated nicely. He knew it was time to downsize, but he wanted to move to an area that was close to the beach and into a home that was newer and in a nice community.
He knew that he would have a hard time qualifying for a traditional mortgage big enough to afford the home he wanted, and even if he did qualify, he did not want a large mortgage payment hanging over his head. He could try to buy the new house with the cash from his sale, but then he would have to lower his purchase price and he would not have the liquid assets he wanted to be able to help provide additional income. Gary decided to employ the New Method of Downsizing!
What Gary knew, thanks to his experienced, local, and good looking Mortgage Banker (that would be me), which most seniors and real estate agents don’t know, is that a senior 62 or older can purchase their new home using a HECM for Purchase or the more common name, a Reverse Mortgage.
Hear Gary's Story
How Does this Work and What are the Benefits?
Gary decided to use a reverse mortgage to buy his new home. He was able to get the smaller, newer, home closer to the beach that he had wanted. It was in a good community and he was able to do this only using a portion of the funds he had received from the sale of his house. He could now use the remaining funds to live a more comfortable life and do the things he wanted. All of this and he had no mortgage payment.
Let’s look at the numbers…
If Gary had used all the funds from the sale of his home, he would have been able to afford a home around $350,000. That would not buy him much in San Diego. Now how did the numbers look once he employed the new method of downsizing?
Gary was able to buy the home he really wanted at $450,000 and only needed to put down a little over $200,000. That means that he had another $150,000 of liquid assets that could help fund his retirement and he had no mortgage payment to make.
$150,000 invested over 10 years at 5% return
Let’s look at what that $150,000 could do for Gary over the next 10 years if invested wisely earning 5%. It would grow to $244,334. If Gary decided to draw these funds equally every month over the next 10 years, this would provide him an additional $1,584 per month in income.
Gary was able to accomplish his goal of buying the smaller home he wanted, have no mortgage payment, and have the potential of $1,584 a month of additional income. Which option would use choose – the Traditional or New Method of Downsizing?
Tell me More About What a Reverse Mortgage for Purchase is?
The HECM Reverse Mortgage for purchase is a Federal Housing Administration (FHA) insured home loan that allows seniors 62 and older to use the equity from the sale of a previous residence to buy their next primary home in tandem with reverse mortgage financing. Regardless of how long they live in the home or what happens to their home’s value, they only make one, initial investment (down payment) towards the purchase. There is no mortgage payment required for as long as they live in the house. The interest on the reverse mortgage accrues over time and must be paid when all borrowers move out of the house or pass away. The amount of money available to the borrowers depends on the age of the youngest borrower, the price of the home, current rates, and the county the home is in. Please refer to the graph on the right to see how much money is available based on your age and estimated home values.
- $400k value
- $550K value
- $650K value
- $400k value
- $550K value
- $650K value
Income Available per MONTH by value and age
- Youngest person on title must be 62 years or older
- The purchased home must be a primary residence, occupied within 60 days of loan closing
- Property must be a single-family home, 2-4 unit dwelling, or a FHA approved condominium
- The difference between the purchase price of the new home and the HECM loan proceeds must be paid in cash from qualifying sources such as the sale of prior residence, homebuyer’s other assets or savings
- Borrowers must complete a HUD approved counseling session
- Borrower’s Must meet financial eligibility criteria as established by HUD
- Mortgage Insurance Premium (MIP) ensures the amount owed on the loan can never be more than the value of the home at time of sale
- Independent HUD counseling is required prior to loan application
- Lender may only look to the value of the home for repayment; no other assets may be attached if the loan balance grows beyond the mortgaged home value (non-recourse loan)
A HECM Reverse Mortgage for Purchase loan can help increase the purchasing power and flexibility when buying a primary residence. It can help homeowners 62 years or older purchase their next home:
- Without monthly mortgage payments
- With a lower cash investment than a cash purchase
- Downsize with dignity to a smaller, lower maintenance home
- Buy a home closer to family or friends
- Lower their cost of living during retirement
- Enjoy the Golden Years of your life
Reverse Mortgages are not for everyone, but if you would like to learn more to see if a reverse mortgage could help you downsize more comfortably, please give me a call at 858-829-7186. I would be happy to discuss your situation, run some comparison numbers for you, and see if a reverse mortgage is the right fit. If it isn’t, I will let you know. I have been helping seniors with reverse mortgages for over 12 years and would love to add you to my list of happy clients like Gary.