Some Americans dream of moving to an ideal location to retire. Many want to stay in their same home. As you retire, it is often considered a perfect opportunity to sell your home, downsize and relocate to your dream retirement location. Typically, by this time, the children are no longer “living at home,” so the need to be close to a school or even work is now gone.
Sometimes retirees decide to stay in the same home or local area because their family is nearby while others decide to relocate to be near family, or to an area with more recreation or better year-round temperatures. Sometimes the decision on where to live after retirement is based only on a financial situation.
To Finance Or Not
Despite the reason, there seem to be two mistakes being made after retirement. Retirees need to be aware of the options available to them. Most people of retirement age view purchasing their home as an excellent financial investment and most consider it a better investment than stocks when in actuality stocks are a better investment than a single family home despite their volatility.
Typically, a house will keep pace with inflation, and there are no real returns over time. Often, homes owned by senior citizens are not able to be maintained as well as they once were and therefore decrease in value.
Purchasing a home is not necessarily a wrong decision, after all, everyone needs a place to live. Buying a home is frequently a better decision financially than renting. While houses are not necessarily the best of investments, they are often the best financial decision. Stocks have shown to be the better investment over time. In the long run, houses don’t have a high return when adjusted for inflation while stocks have been proven to be good long-term investment.
As a retiree decides to relocate after retirement, a new home purchase has to be funded or financed. Deciding how to do this is difficult, and the HECM program is overlooked. Many home buyers of retirement age finance their home with a significant percentage of their home financed. A large portion of retired home buyers are using a conventional mortgage, and a tiny percentage uses a fixed then adjustable rate. Some seniors are buying their home outright.
There are drawbacks to both buying a home outright or financing it. Obtaining a mortgage to finance a large amount of the purchase price after retirement can cause serious cash flow and repayment issues. When purchasing a home outright with cash, the cash is locked up in one asset that doesn’t provide high returns over time.
What is a Home Equity Conversion Mortgage (HECM)?
A Home Equity Conversion Mortgage (HECM) is more commonly called a reverse mortgage. The HECM is a Federal Housing Administration (FHA) insured loan. It enables seniors to access part of their home’s equity. It also allows them to obtain tax-free funds without having to make any mortgage payments.
A retiree can put some money down and finance a portion of the home with a HECM. The HECM program has many advantages. This program is to permit senior homeowners to tap into their home equity to support their retirement. The HECM for Purchase is designed for people over sixty-two years of age to purchase a home by putting about half of the cost of the purchase price down and financing the other half with the HECM. This program allows the homeowner not to have to fully fund the purchase through a conventional mortgage or pay all cash up-front.
The HECM program may not work for every situation; it can be an ideal solution for some retirees. For more information, contact the National Reverse Mortgage Lenders Association (NRMLA).
Your Retirement Plan
As you consider retirement and housing, find all of the options available. Each decision will impact your retirement plan and spending budget. Consider if a conventional mortgage or a reverse mortgage is best for your home purchase after retiring. It is essential to understand the house as a place to live to provide for your lifestyle, not as an investment with a return. Deciding where you are going to live is one of the most significant decisions you’ll make. Understand each option as you select your home. Do what is best for you, your retirement plan, spending budget and lifestyle.