Paid cash for your house? Oops...
To many seniors, paying cash for a house seems like a great idea, a no-brainer. You have no loan payments, save some closing costs, and it makes you feel powerful and successful. Plus you saved some time and effort on obtaining a mortgage.
But if you are over 62, you may have just made a mistake. A very large one. How?
Let's look at two buyers:
Joe Cash is retired and has $ 300,000 from the sale of a house he can use to buy another one. He tells his agent, find me something for under $ 250,000 so I will have some money left, but I may stretch a little if I need to. So the agent looks at his list of requirements, shakes his or her head, knowing that what Joe wants will really cost about $ 400,000 in his preferred areas, or close to it. Eventually he buys a house for $ 275,000 that still falls short of his dreams, and has very little cash left. If the housing market drops again, all the risk is his, not the banks. If he needs more funds, he will have to try and qualify for a loan at that time, and hope that he can.
Jane Sharp, an informed and savvy retiree in her 70's, has netted the same $ 300,000 from the sale of her house. But Jane knows that by using a 'H.E.C.M.'- a Home Equity Conversion Mortgage, she can buy more house, use less cash, and still have no payment. She tells her agent to look at properties all the way up to $ 400,000, and her agent quickly locates the perfect one, which she purchases for $ 400,000. After closing, Jane still has $ 220,000 from her last house sale, no loan payments, and the house she actually wanted, where she wanted it. And plenty of equity.
Since her bank is paying a tiny percent on savings accounts or money market, she also decides to over-fund the H.E.C.M. purchase, with the extra going into a H.E.C.M. credit line. The current growth rate turns out to be about ten times what she would have seen leaving her funds in the bank, and she can pull out money as needed, while her available funds keep growing. The best part to her is that unlike a traditional credit line, her H.E.C.M. credit line will not be frozen or reduced due to the housing market. And best of all, her entire H.E.C.M. is a non-recourse loan insured by FHA and HUD.
Jane meets Joe for lunch, they share stories. Joe brags about his all cash purchase, but Jane notices he looks relieved when she grabs the check. Jane smiles, she can afford it.