While the recession was approximately 10 years ago, the changed economy has taken its toll not only on our retirement nest eggs, but also on our dreams for retirement. While dreams of that second retirement home at the beach may have been put on hold, downsizing to a smaller home is not out of the question for young retirees.
In January 2009, the government made available for home purchase the exact same program used to draw equity from an existing home – the Reverse Mortgage. The new program is often called “HECM For Purchase” (H4P). Proprietary/jumbo mortgages also offer the opportunity to use proceeds for a purchase of a home. Jumbo loans generally follow the same guidelines as H4P.
How does it work?
The amount of money available to the homeowner for home purchase is based upon the same rules as available to homeowners for traditional equity redemption.
So for example, Bob and Eileen, both 75 years old, wants to downsize from their MegaMansion (valued at $2m) to a new CozyCottage (valued at $600k). After selling their home, paying real estate commissions, home preparations for sale and current mortgage, they will net $900k. HOWEVER, they will owe capital gains on a portion of that and prefer to retain some of their cash for personal use.
To limit their cash outlay for the new home purchase, Bob and Eileen learned they could qualify for as much as $311k depending on the interest rates available at time of purchase. (This example is based upon a 4.5% fixed rate available June 2018). Yes, they would still need to bring ~$300k to the table for purchase of their new home. But they are using less of the proceeds from the home they just sold, making more money available to enjoy their retirement in their new home.
Bob and Eileen are thrilled. They have no mortgage payments (although they must comply with loan terms such as paying property taxes, hazard insurance). The new cottage has great amenities – an open floor plan, large bathrooms (employing universal design elements), private patio, extra storage and garage. And they are no longer hostage to yard work and high heating bills for a home much larger than they now need.