A lot of folks who are at or near retirement need to access their home equity to do so comfortably.
Here’s the first question most people ask:
“Should I do a reverse mortgage or sell my home?”
In some cases, the answer could be….
Why not do both?
Recently I spoke with Ron in San Jose, California about a reverse mortgage.
Ron is 65, his wife is close to the same age and both are very ready to retire.
Both have good jobs that will pay a pension and Ron estimates that their total combined retirement income will be about $4,000 per month.
After congratulating him on managing to assure an annual income of $50,000 per year he said…
“but there’s a problem…”
When $50,000 a year is not enough…
Ron and his wife own a home in San Jose with a value of $630,000 and they owe $501,000.
Their mortgage is $3,000 per month. As Ron put it,
“if I retire with that house payment I’ll be housebound ….there will be no money left to do anything…”
He said “if I could just eliminate my mortgage payment I’d have enough income to live very well.”
20% Equity is a bridge too far:
Ron’s neighbor just did a reverse mortgage and that neighbor was able to eliminate his monthly mortgage payment. Ron thought the same solution might work for him.
Unfortunately the situations were very different … while it worked for Ron’s neighbor (who had sufficient equity) it didn’t work for Ron.
Based on Ron’s current mortgage balance his home’s value would have to increase to more than $817,000 for him to qualify for a reverse mortgage.
Let’s take a look at the loan calculator numbers…
The following is a report of Ron’s actual situation when calculated by the IBIS Reverse Mortgage online Calculator.
Notice the number ($186,494.90) in red meaning that his equity is short by that amount.
I realize the rest of the numbers can be a little confusing without an explanation but the important point is to note that in this case, for Ron, a reverse mortgage is simply not an option.
The Ibis reverse mortgage calculator is a free online service and I chose it to create this sample because unlike the others you’re not required to enter all of your contact information in order to use it.
If you would like to find out how much of a reverse mortgage that you would qualify for while being assured that no sales rep is going to pester you after you’ve given your basic information use this link:
Reverse Mortgage Calculator
So what’s Ron’s solution?
Here’s the dilemma:
Ron can’t qualify for a reverse mortgage on his current home, so he’s locked into that $3,000 mortgage payment unless he sells the house.
But if he sold the house and rented something in the same area his rent would be equal to or greater than his current mortgage payment.
Yes it’s true that he’d have $100,000 cash in his pocket from the sale proceeds after paying off the loan but with rent of $36,000 per year he’d only have three years before all of his equity was consumed.
Ron and his wife are not from the San Jose area originally and really have no ties to that community.
They are willing to relocate to another area if that means they could live comfortably and have enough money to actually enjoy their retirement.
Which means… Ron has some options.
The Solution Could be Reverse Mortgage for Purchase
In a previous post I talked about using the HECM (aka reverse mortgage) for Purchase (or H4P) to afford a larger or more expensive home…
…but what about using the program to downsize?
Keep in mind Ron would have about $100,000 cash from the sale of his San Jose house.
That’s a great down payment on a $200,000 home and the second $100,000 could come from a reverse mortgage for purchase.
Ron and his wife can live in the home without a mortgage payment and will have the entire $4000 monthly retirement income to pay for expense and have enough left to really enjoy their retirement years.
That sounds fantastic, right?
Why… aren’t… more… people… doing… this?
Let’s take a look at a study of home buyer’s preference in financing a home purchase:
A majority of home buyers over 62 prefer to buy their home using a traditional forward mortgage rather than a reverse mortgage, according to the results from a new survey by the National Association of Home Builders (NAHB). Of 4,326 total responses garnered by NAHB, only 3% of buyers say they would use a reverse mortgage to pay for their new home, whereas 67% would likely use a traditional mortgage, whereas 28% would pay in all cash. Only 2% of buyers said they would use “other” forms of payment.
The answer is simple.
There is a perception by both baby boomers and seniors alike that reverse mortgages are inherently bad. Why is that?
People naturally feel skeptical about anything that they don’t fully understand and very few people understand a reverse mortgage.
On the other hand what most people believe they know about a reverse mortgage is usually wrong.
For example, the majority of seniors believe that “the bank takes your house when you die” which has never been true. These preconceived ideas are very unfortunate because they keep many people who, (like Ron) could greatly benefit from embracing this vital tool.
Ok… but how is Ron going to replace his San Jose home with something comparable that he can buy without paying a mortgage?
Well…. he can MOVE...
Here are 10 locations that work:
- Prescott, Arizona – Average Home Price: $256,400
If you love the outdoors and a vibrant cultural scene, you should consider retiring in Prescott, Arizona. Located in the north of Arizona, this old mining town experiences a cooler summer than southern Arizona, helping you steer clear of sweltering summer temperatures. A booming economy, rich history, and low housing prices make this place a real contender for retirement.
- Venice, Florida – Average Home Price: $210,000
Venice is a small retirement community found on the Gulf of Mexico in Florida. Named after Venice, Italy, this community has many canals and rivers that run through it and has been designed with architectural influence from Italian renaissance. Calm traffic and low prices mean peaceful retirement and it’s particularly well suited to slightly older retirees. Parks, beaches, golf, tennis, and proximity to the beach will keep you busy, and proximity to nearby Sarasota will mean you have everything you need.
- St. Augustine, Florida – Average Home Price: $208,000
The historic community of St. Augustine, Florida, is a perfect retirement location for history buffs. The local economy is driven by tourism, so if you’re keen to volunteer and stay an active part of your community, this might be the city for you. On the north east coast of Florida, this city experiences cooler temperatures than other options in the state.
- Beaufort, South Carolina – Average Home Price: $156,700
The quaint, charming southern community of Beaufort, South Carolina, is a prime retirement spot. This old river town offers plenty of golfing and fishing during the mild winters and hot summers. The military installations in the city solidify the economy and diversify the population – while Beaufort is home to a growing retirement community, there are lots of families here as well.
5. Myrtle Beach, South Carolina – Average Home Price: $207,141
Whatever you are looking for in your retirement locale, from downtown living to a planned community, Myrtle Beach has what you need. Some of the highlights are the Grand Stand – a huge stretch of pristine sandy beach, trendy shopping and restaurants, low cost of living, great theater, excellent medical care, and enough golf courses to keep things exciting. All these reasons will make you love your retirement life in sunny Myrtle Beach.
- Abilene, Texas – Average Home Price: $244,295
If you’re looking for an affordable retirement, head to Abilene, Texas. With cost of living over 10% below national average, this old railroad shipping town has a growing retirement community. Year round warm weather and excellent recreational and social opportunities for senior citizens of Abilene will keep you entertained and in good company all year round.
- Austin, Texas – Average Home Price: $255,000
This big city offers plenty of activities to keep the retiree busy and engaged. Home to the University of Texas, this cultural hub boasts a terrific economy, warm weather, plenty of volunteering opportunities, open air art markets, galleries, museums, performing art theatres, low crime, and it’s the live music capital of the world. With so much going on, this city would be best suited for energetic retirees who aren’t looking for too much peace and quiet!
- Boise, Idaho – Average Home Price: $188,700
Boise, Idaho makes a great retirement destination for active adults. Into biking? This city was rated one of the best cities to live and ride. Love the outdoors? The mountains are at your doorstep, and the river offers whitewater adventures for the daredevil retirees out there. In downtown Boise, there are many shopping, eating, and cultural opportunities. Walking paths and low crime rates mean that you will feel confident stepping out into this great retirement city.
- Palm Springs, California – Average Home Price: $337,500
Located in the Coachella Valley, Palm Springs is one of world’s most famous retirement communities. The breath taking landscape and rich culture draw people from all around the globe to retire here. Active retirees can enjoy the golf scene and the nearby Joshua Tree Park, and everyone can enjoy the 350 days of sunshine a year. Watch out though – summers here are so hot you’ll have to retreat to the air conditioned indoors!
- Salt Lake City, Utah – Average Home Price: $240,800
Nestled into the Wasatch Mountains of Utah and next to the Great Salt Lake, the beautiful Salt Lake City is a picturesque place to retire. Perfect for the active adult, you can enjoy golf and winter sports galore. Clean air, booming economy, plenty of volunteering opportunities, and an above average doctor per capita rate make this city a prime retirement spot! Salt Lake experiences cold winters and hot, dry summers, so skip this city for retirement if you can’t take the cold!
Notice that these 10 cities represent every region of the country (other than Northeast) and provide every kind of topography, climate, and life style that you could ask for.
In other words, there is often no reason that you can’t have the kind of retirement that you’ve always dreamed of.