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 close 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.
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.
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.