When’s the last time you walked into a store that didn’t accept credit cards as a form of payment? If you had to stop and think about it, you’re like most others. It is probably easier to remember the last time only credit was accepted and cash wasn’t.
When it comes to buying a house in retirement, more specifically when we are relocating, downsizing or transferring to a more conducive home to age in place, cash is still king. Most people will take the equity in their existing home once sold and use it to purchase their retirement dream home. There may be plenty of reasons behind the decision but most likely it’s as simple as not wanting to have a housing payment in retirement. To eliminate housing payments in retirement is a tremendously smart idea. Did you know that only 60% of Americans today are not carrying a mortgage into retirement, meaning: they have no payment. However, the smartest idea might just be to HAVE a mortgage in retirement and still have no payment. How does that work?
The Home Equity Conversion for Purchase is a relatively unknown option for homebuyers over the age of 62. It’s so unknown that we stopped asking realtors if they knew about it when we first met them and began to assume they didn’t. We hope you’ll forgive us for our presumption, the figures might help you understand why our behavior changed.
Although the program launched in 2009 it has not been widely adopted. We believe this is from lack of education, not lack of value. Take the state of Florida for example. There are over 3 million individuals over the age of 60 in the state of Florida. We know, nationally, more than 1/3 of seniors have plans to relocate to their last and final home. Excluding those that have already found their last residence and with a growing demographic of retirees (over 10k hitting age 62 a day) we’ll estimate that somewhere north of 1 million seniors will relocate in Florida alone over the coming years. In addition to the numbers of seniors moving, the amount of wealth found in the senior market is incredible. In fact, there is so much wealth in the senior housing market that it is projected to exceed total retirement wealth in less than a handful of years. Currently senior housing wealth sits at over $6.7 Trillion with a capital T.
You might expect that with that large of a demographic that the Home Equity Conversion for Purchase AKA Reverse for Purchase Mortgage would represent a sizable percentage of the market. However, less than 500 Reverse for Purchases were done in Florida for the entire year of 2017!
Why is this? We think it is a lack of education. After all where do you go to school to learn the financial planning implications of introducing a Reverse Mortgage in retirement? Some may say ignorance is bliss. We like to think bliss is when you can help a client find their retirement home and keep a substantial portion of their money liquid to enjoy and live better in retirement. Let us take this further with an example.
Clients Bob & Jane sell their home and net total proceeds of $300,000. They are looking to move into a smaller 1 story home closer to their grandchildren in south Florida. They ask their realtor to find them a home for $250,000 or less and intend to pay all cash. Bob & Jane expect to use the remaining $50,000 for liquidity in case the home they find needs any additional work and so they can spend more time travelling. Their realtor shows them many properties and they settle on one at the price point requested.
Clients Alan & Deborah also choose to sell their home and net the same total proceeds of $300,000. Alan and Deborah’s realtor knows about the Wellspring Lending Group and suggests Alan and Deborah speak to one of their Reverse Mortgage Planners. After much consideration Alan and Deborah decide to consider the Reverse for Purchase and ask their realtor to find them a home for $250,000 as well. After a lot of searching Alan and Deborah fall in love with a home that is above their price range at $350,000. However, they happily realize they can use the Reverse for Purchase and only put approximately 50% down or $175,000.
Both Bob & Jane and Alan & Deborah ultimately purchase retirement homes, but with very different outcomes. Bob & Jane have a home worth $250,000 with only $50,000 of liquidity available for whatever purposes they see fit to spend the money on. Alan & Deborah on the other hand now own a $350,000 home and have $125,000 available to use in retirement. Although Alan and Deborah purchase a home valued at $100,000 more than Bob and Jane they have substantially more liquid assets available to them to help achieve other financial goals in retirement.
When viewed from a context of retirement planning, most Americans are woefully underfunded and under prepared for a retirement spanning 25+ years. Even fewer Americans have successfully implemented long term care insurance. In a demographic in which nearly half of all wealth is tied up in their homes, any strategy that can help increase liquid retirement assets (in some cases dramatically) must be considered thoughtfully. Overwhelming research has shown that strategies such as reverse mortgages will create stronger liquidity and more investment assets while providing a greater retirement income AND…listen to this, a greater net worth to both retirees and legacy to their beneficiaries.
They say Cash is King? Considering buying a home in your retirement years? If so consider using a Home Equity Conversion for Purchase Mortgage. Long live the king.