Should I pay cash for my retirement home?
An Essential Question You’ve worked your whole life; you’ve saved for it, and now its time to buy your retirement home in the mountains of North Carolina. You’re selling your current home and considering paying cash for your retirement home. Coming here for the beauty and lifestyle…is a Great Move.
Paying Cash…may not be the Right Move.
Before you spend your equity, which has taken decades to accumulate to pay cash for your new home, stop to answer this essential question: Why would you pay cash for your retirement home…WHY? Because you can, is not a good answer. Because you don’t want a mortgage, is not a complete answer.
People pay cash, so they won’t carry a mortgage payment into retirement. It’s optimal not to carry a house payment into retirement. However, that does not mean you should pay cash for your retirement home.
HECM For Purchase Smarter than paying cash, utilize a unique mortgage, developed by the Dept. of Housing and Urban Development (HUD) and insured through the Federal Housing Administration (FHA), known as a Home Equity Conversion Mortgage (HECM). Pronounced “Heck-Em”, this newly revised type of Reverse Mortgage, is specifically for the 62+ age group to enhance income planning and housing choices in retirement.
The HECM for Purchase(H4P) is for primary residences and never requires a mortgage payment. This loan allows you to put down a portion of the price of the home, which is determined by the age of the youngest borrower, and you keep the rest in cash.
With a H4P : You hold title as owner of the property, Because it’s FHA insured, you can never owe more than the home is worth, You are never required to make a Mortgage Payment.
Retirement experts hail the H4P as a smart and prudent alternative to tying up your cash in home equity. As Wade Pfau, Ph.D. CFA and Professor of Retirement Income, at the American College of Financial Services says; “The HECM for Purchase program allows for fewer distribution needs from the investment portfolio, because a greater portion of the home’s cost can be financed by the reverse mortgage”.
Qualifying for a HECM HUD has made significant enhancements to the program to document a person’s ability to sustain the home and ensure a surviving spouse can live in the home forever. Once the last remaining borrower leaves the home permanently, the estate controls ownership, retains the equity and has up to one year to settle the balance.
To qualify you must: Be at least 62 years of age, Make a 40%-60% down payment, Pay property taxes and homeowner’s insurance, Live in and maintain the home as your primary residence.
Cash vs Equity Cash is king. Throughout retirement cash is far more valuable than equity. Income planning requires thoughtful allocation of all your assets. Running out of cash in your later years is an issue you must confront now, as you consider paying cash for your retirement home.
Think this through carefully. Consider a HECM for Purchase, to preserve your cash and extend your precious assets…because you have much more living to do.
By Paul Donohue, housing, finance and retirement specialist,