You’re 65 And About To Pay Cash For A New Home, Is That The Right Move For You?
Here is an interesting scenario. You are 65 years old and selling your home and are about to buy a new $300,000 home. Should you pay cash, get a traditional loan or get a reverse mortgage? My guess is that about 98% of you reading this article answered that question by saying “pay cash.”
The reality is that it depends. There are actually lots of other questions that need to be answered before you can really say whether you should pay cash or not. Two of the most important are below.
Do you have liquid assets like an IRA, stocks and bonds, cash, etc.?
If not, how will you deal with large expenses in the future such as needing a new roof, HVAC unit, unexpected medical bills, car problems or the endless list of financial challenges life can throw at you?
If you do have other liquid assets, given you current rate of usage, how long will they last?
Do you have enough monthly cash flow?
Do you have enough cash to live every month; not just get by, but actually enjoy your retirement without becoming a TV zombie?
With those questions in mind, let’s take a look at the various options you may have available to you.
Pay Cash for the Home
Paying cash for a home is great. There are no monthly mortgage payments to worry about. The purchase process is cleaner, smoother and faster. And more often than not, cash offers take priority over offers that are contingent on financing. And finally, the closing costs are minimal when compared to using financing.
The problem with paying cash is that you are tying up liquid cash into an illiquid asset. The only way you will be able to get access to that cash again is to either get a mortgage or sell the home.
If you were going to pay cash for a $300,000 home, every dollar is tied up in the home. There are no cash reserves.
Use A Reverse Mortgage to Buy the Home With 49% Down
With a reverse mortgage, at 65 years old, you would need approximately $147,052 for the down payment and closing costs.* The big benefit to this is that you do not have any monthly payments just like paying with cash. And just like cash, you are still responsible for paying your property taxes, homeowners insurance and other property charges.
The bigger benefit is that you get to keep about 51% of your cash instead of tying it all up in the home.
If you were purchasing a home for $300,000 about $147,052 would go towards the down payment and closing costs. The remaining $152,948 could be put in the bank or a low risk liquid investment.
If you needed additional cash flow, you could pull out $1,000 a month from the bank and these funds would last you about 13 years, assuming little to no interest growth.
If you didn’t need additional cash flow, you would have a significant amount of funds for future needs if and when large unexpected expenses arise.
Pay Cash for the Home and then Get a Reverse Mortgage
The other option would be to pay cash and then get a reverse mortgage. This would give you a $152,948 line of credit. This is the exact same amount of available funds as the retention of cash with the minimum down payment option above.
One of the really cool features about the reverse mortgage line of credit is the growth on the unused portion. The unused portion grows at the current interest rate plus 1.25%. As I am writing this article, the initial interest rate is 4.427% and the growth rate is 5.677%.** In other words, the amount you can borrow, which is the unused portion of the line of credit, is growing at 5.677%.
If you pulled out $1000 a month, the line of credit would last almost 22 years assuming the growth rate never changes. The funds could last you about 9 more years when compared to cash because of the growth on the line of credit.
If you never used the $152,948 line of credit, the amount you can borrow grows. In 5 years it would grow to $208,834, in 10 years to $285,140, and in 15 years to $389,327. This is assuming the growth rate does not change. Think about that. In this scenario, 15 years from now, you would be 80 and you could have $389,327 available for your use. This comes at a time when the likelihood for in-home care has increased and there is also a higher chance for large medical expenses and expensive medications.
You can start the process of getting a reverse mortgage the day after the purchase transaction has closed.
Use a Reverse Mortgage and Put $300,000 Down
The numbers work out to be exactly the same as paying cash and then getting a reverse mortgage.
The big difference is that when you pay cash for a home, an all cash offer has a higher chance of being accepted, you may be able to negotiate a better purchase price and there is no stress in regards to an appraisal or trying to meet closing dates. In other words, it typically makes much more sense to pay cash and then get the reverse mortgage.
Finance the Home with a Traditional Forward Mortgage
Assuming you qualify for a traditional forward mortgage, this is also another option. Again, assuming you qualify, you could put a small amount down which would allow you to retain the vast majority of the $300,000. There could be some serious pitfalls to this option.
The biggest and most obvious downfall to this option is that you will have a monthly mortgage payment to make. If you took out a 15 Year mortgage, you would be 80 when you paid it off. If you took out a 30 year mortgage, which is what most people do in order to have the lowest payment; you would be 95 when you pay it off. This of course is assuming you only make the minimum payments.
The other issue with making a monthly mortgage payment is that it eats into your cash flow. The higher the mortgage payment, the fewer funds that is available to enjoy your retirement. The last thing you want to become is a TV zombie because the mortgage payment is sucking up your fun money.
If you plan is to put as little down as possible in order to retain cash to supplement your income, a mortgage payment can drain your cash reserves quickly. Putting more down reduces the mortgage payment but leaves you with less cash reserves.
Buying a home is a large financial decision that should not be taken lightly and assumptions should not be made. Before buying your next home, I would highly encourage you to look at the various options you have. There is more to buying a home than paying cash that you need to take into consideration. The choices you make can affect you through the rest of your retirement.
I specialize in reverse mortgage throughout the state of Oregon. Give me a call to discuss how using a reverse mortgage could be used to purchase your next home. I work with clients all across the state from Klamath Falls to Brookings, Eugene to Bend and Portland to Medford and everywhere in between.
*Down payment is based on actual date of birth of the youngest borrower and an assumption the expected rate is 5.06% or less. Closing costs vary depending on the title and escrow company used and area of state where the loan will be closing.
**Rates as of 4/5/2017 and for illustrative purposes only. Based on one year adjustable rate mortgage which can adjust up or down a maximum of 2% per annual adjustment. Margin 2.625%, 1-year LIBOR index 1.802%, initial interest 4.427%, expected rate 4.995%, Cap rate 9.427%.