Opt ionsfor Moving in Ret irement Using theHECM for Purchase By: John Salter, Ph.D., CFP ®
SUMMARY Many retireeswill choose tomove from the largehome in which they raised their family into somethingsmaller and moremanageable tomaintain. These retireeswill be facedwith the financial decision of howtobest finance their new home. Traditional financingoptionsexist which includepayingcash for thehome, or usingatraditional mortgage. One newer, and lesser known option, istheHomeEquity ConversionMortgage (HECM) for Purchase, where theHECM reversemortgagecan beused directly for thepurchaseof anewhome. INTRODUCTION Asbaby boomersenter retirement many will decidewhether to stay in the larger home in which they raised their family or move to somethingsmaller andmoremanageable, and onewhich better fitstheir lifestyle. Larger homesrequire more timeand expense in cleaning, repairing, maintaining theyard, andmany other factors. The ideaof ?right-sizing,? or findingan alternative that better meetstheir needsmay take intoaccount these factorsin determining thechoiceof anewresidence. An examplemay include the retireewhoenjoystravelingandmay want tomove toahomewhich requireslittlemaintenancewhile they areaway, such asagarden homeor condominium. Many of these factorsmay be morequalitative, or related to lifestyle, rather than pureeconomic decisions. Financial decisionsmay include lowering expensessuch asutilities, real estate taxes, cost of maintenanceand upkeep, aswell assimply purchasingaless expensivehome in order to freehomeequity tobeused for funding futuregoals. Onemajor financial decision ishowtoapproach financing thenewhome. Traditionally, wehave relied on twomain methods: payingcash or usingatraditional mortgage. Many retireeshavean aversion todebt, particularly with carrying amortgage into retirement. For these retirees, theoptimal method of purchasinganewhomewould bepayingcash and beingmortgage-free. However, for many retireesthisoptionmay not bean option. Fundswould need tobeavailable either from thenet saleof theold homeafter payingoff any existingmortgageor fromalternativeasset sources, such as retirement savings. Onemajor factor in using retirement assetstopurchaseanewhome isthe tax liability froma lump-sumdistribution from retirement accounts, wherearetireemay pay more in taxesby distributingalargeamount from retirement plansfor thepurchase. Alternatively, aretireemay choose toobtain atraditional mortgage for their newhome. In thisscenario, the retiree would only be responsible topay theminimal down payment required, andwould then finance the remainder of the purchase for thedesired loan term. In thisscenario, the retireewould havemore flexibility in resourcesafter the purchase. Onemajor risk to consider isfuturecash flowconsistency. Traditional mortgagepaymentsare required and should any decrease in cash flowoccur, themortgagepayment isnot something the retireecan defer. Resultsin this scenario includebecomingdelinquent, thereby negatively impacting the retireescredit score, needing to sell the property toeliminate themortgagepayment or, at worse, foreclosureof theproperty.
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