I’ve written before about Colorado Springs as a retirement destination. I won’t bore you with repeating it all, you can click the previous link to see more about that. Suffice to say that Colorado Springs has a LOT going for it for retirees. But recently, I am running into more and more retirees that have strong equity positions, that want to buy a house to retire in in Colorado Springs, but aren’t sure about the whole financing strategy. Here are the main options people usually consider.
1. Pay Cash
Paying cash for your retirement home is obviously an awesome thing. You have no house payment, (other than insurance and taxes, and possibly HOA fees), and it allows all of your retirement income to be used for other things. If you have plenty of cash, and don’t really need it for anything else, it is THE best way to go. However, there are a couple of reasons why this isn’t always as great as it sounds.
- Interest on some of that cash may be the SOURCE of some of your retirement income.
- Emergencies happen, and the cash isn’t always that easy to get at when tied up in your home.
- Home prices and cash on hand don’t always match, and the home you get for the cash you have, may or may not be one you want to live in, whether it be size, layout, condition, or area of town.
2. Traditional Mortgage
Rates are extremely low right now (3.5% or so for a traditional 20% down 30 year fixed at the time of this writing from most lenders). Borrowing part of the purchase price at these low rates makes sense, under the right conditions. There are some trade offs that should be considered however.
- Traditional mortgages have to be paid back a little at a time, every month. That means a mortgage payment has to be a part of the budget. If your retirement income is based on 2 people, and one passes away or has to be admitted to long term care, it can become difficult to continue to live in the home if there is a monthly mortgage payment that can no longer be met.
- You have to qualify based on income and credit for a traditional mortgage. The banks have no problem loaning money for 30 years to someone who is a 100 years old, as long as they have adequate income and credit to qualify, but they are subject to normal qualifying guidelines.
3. Reverse Mortgage
The reverse mortgage is the newest and least understood of the 3 main options. While they have been around since the 80’s, a lot of new options and rules have been put into place since they first came out. Here are a couple of highlights for the ‘new’ reverse mortgage that are important to know.
- Virtually all reverse mortgages being written today are underwritten by the US government as part of the FHA, and are heavily regulated, including a requirement for any borrower to go through a counseling program to make sure they understand the program. Counseling is independent of the loan origination process, to be sure it is fact based and not a sales pitch.
- Reverse mortgages are based on a complex set of rules based on the borrowers age and the value of the home, not on credit or repayment ability.
- Reverse mortgages, while originally designed to help seniors (the youngest spouse has to be 62 or older) stay in their homes and access their equity, can now be used to PURCHASE a home.
- The homeowner does NOT MAKE PAYMENTS on the loan, and in fact can be structured where they actually RECEIVE monthly payments as disbursements from the loan.
- The loan becomes due only when the LAST SURVIVING SPOUSE permanently leaves the home due to death or other circumstances
- The homeowner (or their estate) still owns the home, and has the right to sell the home and keep any remaining equity in it.
- If there is no remaining equity in the home, it is a non-recourse loan, so the homeowner or their estate has the OPTION of simply turning over the keys when the loan is due.
There are of course some things to watch out for, and some disadvantages associated with these loans as well.
- The costs and interest rates associated with reverse mortgages are higher than regular mortgages, making it an expensive loan especially if it is used for only a short time. These should not be used to solve a temporary cash flow problem.
- The amount that needs to be repaid when the house is sold INCREASES over time, so the homeowners equity shrinks if there is either low or no appreciation of the homes value (although negative equity does not affect the homeowners ability to stay in their home)
- The amount of Loan to Value (LTV) or size of loan is greater the older the YOUNGEST spouse is, and both must be over 62 in order to use the product at all. NOTE: Some situations have arisen where an older spouse gets a reverse mortgage and does not have the younger spouse (because they aren’t 62 yet) on the loan (or title), and when they unexpectedly pass away, the younger spouse that was not on title loses the house. The older you are, the more they let you borrow, and you have to know that trying to get around the rules like this can ruin your life.
- You are still required to pay the property taxes, insurance and HOA fees, so it is very important to budget for these.
- If you are investing the proceeds (or cash saved from purchasing) make sure it is an appropriate investment vehicle for your age, circumstances and stage of life. Markets rise and markets fall, and more than one senior investor has lost their nest egg by investing in risky ‘high yield’ investments that evaporated. Think SAFE and LIQUID in the autumn of life.
- There are many different options available with these products that can be complicated and difficult to understand the trade offs. The rate can be fixed or variable. It can be structured as a lump sum, line of credit, or monthly disbursement stream. This is part of the reason counseling is required for these loans. Deciding to use the product is only the first step, deciding HOW to use it can make a big difference.
The AARP has an excellent video about reverse mortgages that is worth viewing. While it does not go into a great deal of depth on all the options and ins and outs, it does deal with some of the pros and cons and concerns that people have with this product.
For more information about this and other information about living in Colorado Springs, Colorado, call Rick Van Wieren 719-331-7675.