The Single Best Tool for Downsizing in Retirement is Called: HECM-for-Purchase

In 1935, when Social Security was first introduced in this country, the average male retired at age 65… and then died at age 67.  So, back then, preparing for retirement meant saving enough to support your lifestyle after retiring for a handful of years, on average.

Today, when someone retires at 65, his or her average life expectancy is over 15 years, which means that half of that population, after turning 65, will live past 80.  And once you make it to age 80, your average life expectancy will be almost 90.  At 90… it’s almost 95.

The simple fact is that today retirement is measured in decades… not years.  And that, combined with the rising costs of health care among other things, makes saving enough so that you can maintain your lifestyle and don’t run out of money before reaching your life expectancy much harder than it ever was in the past.   

Today, very few 65 year olds have enough saved to maintain a comfortable lifestyle for 20 years or longer without running out of money.  One study I read recently said that the average balance in a 65 year old’s 401(k) account is $100,000… another report showed that number to be closer to $160,000.  Even having $1 million in savings today is no guarantee that you will make it 20 years or longer without bringing home a paycheck from work.

If you’re paying attention to what the media is saying about retirement, more and more articles are talking about this as a “looming crisis,” and that’s a trend destined to continue throughout my lifetime, as this country watches 80 million baby boomers age into their 80s and beyond.

Look, it’s not that we all didn’t try to save more for our retirement years… we’re not all irresponsible spenders, as many would have you believe. It’s that we’ve been bubbled to death over the last 30 years, stuck in a near zero interest rate environment that makes safely saving money almost impossible, and all the while, we’ve endured college tuition costs that are up by 1100% over the last decade, to say nothing of health care costs that are completely out of reach.

The only thing many of us have of significant value is our homes, but we have to live somewhere so selling a home to fund retirement is often not helpful. 

For example, let’s say you’re home is worth $500,000 and you’ve managed to pay it off or at least come close.  You could sell it for $500,000… but then you’d need to find somewhere to live that costs less than $500,000.  Otherwise, why sell it, right?  I mean, if the next house is going to cost $500,000 or close, what’s the point of going through the hassle of selling and moving?

And so we stay put, hoping that we’ll somehow be able to keep paying the bills on Social Security and whatever else we’ve got in the bank after raising families, recovering from recessions and sending kids to college.  Ask people over age 50 what they plan to do about retiring and most will tell you: “I’m just going to keep working until I drop dead.”

That’s a cute phrase, I realize, but when I hear it I always wonder whether the person saying it understands that life often doesn’t work like that.  In fact, a recent study published by USA Today showed that 50 percent of those that plan to keep working past age 65, end up retiring unexpectedly.  Half end up having to retire for health reasons, but another 20 percent retire to care for a family member, and the rest because they get laid off at work or something similar. 

There is one answer that would go a long way towards solving the problem for many Americans and it’s shocking how few know about it… it’s called: HECM for Purchase.

A HECM for Purchase is a type of FHA insured mortgage that, when used in conjunction with downsizing one’s primary residence, can provide retirees with the money they need to survive retirement, even if they haven’t saved a dime.

Here’s how it works…

Let’s say that my wife and I own a home in Southern California that’s worth roughly $700,000, and by the time I reach age 65, let’s say we’ll owe about $100,000 on our mortgage.  And who knows… maybe it’ll be worth $750,000 by then, or maybe even a little more.

So, if we were to sell our home at that point in our lives, I think it’s safe to assume that we’d walk away with at least $600,000, after repairs, sales commissions and moving costs, et al.

Of course, in Southern California the only kind of house we’d be able to buy for less than$600,000, would be on Boardwalk or Park Place, right?  I actually can’t imagine anything in Southern California that we’d like living in that would sell for less than $600,000.

Enter the HECM for Purchase…

However by using the HECM for Purchase, we’d be able to put a little less than $300,000 down on a $600,000 home, and then not have to make any monthly payments as long as we’re living in the home and continuing to pay our property taxes and insurance.

That would mean that we’d be able to put $300,000 in our own bank account and still buy a $600,000 home or condo… and all because we used the HECM for Purchase to make it happen.

Now, if we don’t make any payments on the loan, the interest will will be added to the balance of the loan.  Someday, when either we sell the home or after we’re both gone and our daughter sells it, she’ll keep whatever equity is remaining in the property and the rest will pay off the HECM for Purchase mortgage that we used to buy the home, but on which we never had to make payments. 

Think about it… one day we were sitting in our $700,000 home that we purchased back in 1990 and in which we raised our daughter, wondering how we’d make it through our retirement years, scared that we’d end up a burden on our daughter or not able to afford the medical care that one or both of us could someday need…

… and the next day we sold our home, put at least $300,000 in our bank account, and purchased another home for $600,000 using the HECM for Purchase so that no monthly mortgage payments would be required.

Yesterday, we had no money in the bank to speak of, but after selling our home our account balance was over $300,000… we had no mortgage payments to make each month… and we could continue living in that home while making no payments until both my wife and I had passed away.

With no monthly mortgage payments to make, we would then be able to live on our combined monthly income from Social Security, and with $300,000 in the bank, we could also pay for the unexpected expenses that come up from time to time, take vacations here and there, and buy our grandkids gifts on their birthdays and on holidays.

In addition, by investing $200,000 of the proceeds from the sale of our home, we’d also able to earn some interest on our money… let’s say five percent a year is reasonable assumption, so that’s another $10,000 a year that’s being added to our balance, at least during the first five years of our retirement. 

If we really got creative, perhaps we bought a duplex or a place with a rental unit over the garage and so now had a renter paying us $1200 a month, in addition to the $3,200 we receive each month from Social Security.

I don’t know what we’ll do exactly, but what I do know is that the HECM for Purchase is the ONLY tool capable of making it all possible.

And consider what happens when we change the numbers a bit. Some people have homes they could sell for $1 million or more and after paying the sales costs, they can walk away with $800,000 or even more.  After they put $300,000 down on a $600,000 home or condo, they’ll put $500,000 or more into their bank account.

Even if they’ve saved nothing until then, they’ve just put $500,000 into their account because of the HECM for Purchase.  Without the HECM for Purchase, what I’m describing simply wouldn’t be possible.

Why don’t Realtors know about how the HECM for Purchase can work for retirees?

I’ve spent three years studying the HECM mortgage products, and that includes weeks spent calling hundreds of Realtors and mortgage people all over the country.  It’s amazing but I have never come across a single Realtor familiar with the HECM for Purchase prior to my call.

The reason I find this so surprising is that understanding how the HECM for Purchase works would make Realtors more money by creating listings and sales where neither existed before the HECM for Purchase was brought into the picture.

Remember, using my wife and I as the example, without the HECM for Purchase we wouldn’t sell our home and move because we’d have to spend whatever we’d get from the sale of our home on the next home, so what would be the point? 

However, once we came to understand that we could hold onto half the cash from the sale of our home, and still buy another home for $600,000, that we could live in forever without having to make monthly payments… well, now we became ready to list our home and start shopping for another.  All it took was someone to explain to us how the HECM for Purchase would work for us, and in our situation.

So, why don’t Realtors know enough about the HECM for Purchase to explain at least the basics to their prospective clients?  Don’t all Realtors want more listings and more sales? 

Of course they do, but for whatever reason the ones in my neighborhood seem only able to knock on doors, hold open houses, attend networking events, and the like… I’ve asked many of them about the HECM for Purchase and most of the time all I get in response is a blank stare.

How to begin…

The best way for you to gain a solid understanding of how the HECM for Purchase works is to see how your real life situation would be impacted by using it.  First of all, you have to be 62 years of age and own a home.  Next, figure out approximately how much your home is worth and how much you’d expect to receive from the sale after real estate commissions.

Let’s say that number is $500,000.  That’s how much you figure you’ll receive from selling your home.  Now, let’d say that you find a smaller home to move into and it’s selling for $500,000.  By using the HECM for Purchase to buy that home, you’ll only need to put roughly 50% down and then you won’t have to make any monthly payments if you don’t want to… and you can live in the home forever.

That way, the other $250,000 you received from the sale of your home can be deposited into your own bank account.

Of course, with the HECM for Purchase you can make payments whenever you want to make them.  You could make interest only payments or principal payments… or no payments… it’s all up to you.

The HECM for Purchase is a type of reverse mortgage, so you still have to pay your property taxes and insurance, but you never have to make a mortgage payment if you don’t want to.

What if you sold your home for $800,000?  Then you could put $500,000 in the bank because with the HECM for Purchase you could buy a $600,000 home with $300,000 down and no monthly mortgage payments. If you sold your home and received $400,000… you could use the HECM for Purchase and put $200,000 in the bank and use the other $200,000 to buy a $400,000 home.

Get the idea?

There are 10,000 people a day turning 62 years of age in this country and that’s going to continue for the next 16 years or longer.  Soon, we’ll have close to 80 million people over 65, and precious few are prepared financially to live for decades without income from work.  They need creative answers and real solutions and for many, the HECM for Purchase is the single best tool for downsizing available anywhere.

Shouldn’t everyone understand how the HECM for Purchase can change their retirement picture when downsizing in retirement?  It would seem the obvious answer would be yes.

Questions or comments? Email me today at: mandelman@mac.com.

Mandelman out.