Relocating In
Retirement: Don't Make These Common Mistakes
While most Americans show a desire to age in
place, retirement can also be the ideal time to sell your home and relocate or
downsize. Kids are typically grown up and moved out of the home, and the need
to be close to work is gone, so many seniors use retirement as a catalyst for
relocating. Some relocate because of a lifestyle or climate change, others want
to be to family, and others due purely to financial circumstances. Whatever the
reason, retirees appear to be making two big mistakes with their homes. They
seem to vastly misunderstand the home as an investment decision, and they don’t
consider the financing options available to them at all.
In the 2017 National Association of REALTORS®
Home Buyer and Seller Generational Trends Report, homebuyers were asked to
compare the purchase of their home as a financial investment as compared to a
stock. Amazingly, 80% of those ages 61-70 viewed it as a good financial
investment, with over half stating it was a better investment than stocks. Now,
while stocks are more volatile, they do appear to be a far better investment
option than a single family home. Generally speaking, homes keep pace with
inflation and provide no real returns over time. Additionally, many
senior-owned homes tend to decrease in real value terms over time due to a lack
of updates and upkeep to the home. In 2017 the Dow posted a 25% return, while
home values have surged over the past year, only netting out a roughly 6%
return over the same time period. While 6% would normally be great, it pales in
comparison to stock returns over the past year.
This does not mean that purchasing a home is a
bad decision. You need a place to live, and buying a home is often a better
financial decision than renting. The reality is that homes are not good
investments, but they can still be a good financial decision. Nevertheless, the
fact remains that stocks have proved historically to be a good investment in
the long run, while homes stay flat when adjusted for inflation.
When relocating in retirement, a new home
purchase must be financed or funded in some way. There are a lot of options for
doing this; however, few seniors appear to be reviewing the entire range of
financing options. According to the same 2017 NAR® Generational study, roughly
68% of home buyers aged 61-70 financed their home, with a median percent of
their home financed at 81%. Additionally, 89% of these individuals used a
conventional mortgage. Another 4% used a fixed then adjustable rate, 2% used an
adjustable rate, 4% didn’t know what type of mortgage they used and 2%
responded other.
In the end, the majority of seniors relocating
are doing one of two things, mostly financing their home purchase through a
traditional mortgage or buying the new home outright. Unfortunately, both of
these options come with some serious drawbacks. Taking out a new mortgage to
almost fully finance the home purchase in retirement creates some serious cash
flow and repayment issues. Additionally, those purchasing a home outright with
cash are essentially investing and locking up a lot of their wealth into one
asset that does not provide great returns over time.
Instead, more seniors should consider putting
some money down and financing a portion of the home with a HECM for Purchase,
which is a variation of a reverse mortgage. This can mitigate problems on both
sides by eliminating the requirement to make monthly mortgage payments and
freeing up cash for other uses. Additionally, with less than 1 percent of
seniors using a reverse mortgage, and even fewer using it to purchase a home
through the HECM for purchase program, more seniors need to understand the
program and its benefits. Reverse mortgages were designed by the Government to
allow senior homeowners to tap into their home equity to support their
retirement. A number of years ago HUD revamped the program to also allow
homeowners 62+ to buy a home with a variation of the Home Equity Conversion
Mortgage, commonly referred to as a reverse mortgage. While the more common
reverse mortgage allows homeowners to leverage a portion of the equity in their
home, the HECM for Purchase is designed for those 62+ to purchase a home by
putting forth about half of the cost of purchase price and financing the other
half with the HECM for Purchase. This allows the homeowner to not have to
fully fund the purchase through a conventional mortgage or pay all cash
up-front.
Chris Kargacos, SVP of Sales at Retirement
Funding Solutions, a leading lender of the HECM for Purchase, stated “this
program can be a good option for senior buyers who are looking to right size
their housing needs and potentially bolster their retirement portfolio or
improve their cash flow position. While this may not be a fit for everyone, it
can be a viable option for some.” While the HECM for Purchase does not make
sense for everyone, it makes sense for a lot more buyers than are currently
using the program. (For more information on the HECM for Purchase check out
this guideprovided by the
National Reverse Mortgage Lenders Association or check out this short video).
When it comes to retirement and your home, look
at the options out there and understand how each decision impacts your entire
retirement plan. Taking on debt through a conventional mortgage or a reverse
mortgage can be a viable strategy to facilitate a home purchase in retirement,
but understand the impact and costs associated with the transaction. Don’t view
the home as an investment strategy but instead as purchasing a place to live
that will support your desired lifestyle goals in retirement. Where to live is
one of the most important decisions you will make in retirement, so take the
time to review your options and understand the implications of financing your
new retirement home.
Sponsor of the Tucson SPOTLIGHT Senior Services & Living Options Resource Guide
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