The 62+ Loan: An Interesting Option for Financing a Home Purchase
When the time comes to build or move to your retirement home, there are several options to consider. First (and simplest), pay cash for the entire purchase price. This may be feasible if you are selling a home that no longer carries a mortgage. If, however, the funds are coming from a retirement account or a taxable account with high unrealized gains, the after-tax cost of the transaction may be prohibitive.
Second, put 20% down and finance the remainder with a standard mortgage. While this option leaves you with a great deal more liquidity than the outright purchase option, it does engender an obligation to pay principal plus interest every month. This may become burdensome, especially in an adverse financial or health-related scenario. Also, there is no guarantee of finding a lender to give you a favorable interest rate.
The third option is a variation on a Home Equity Conversion Mortgage (aka reverse mortgage) known as the 62+ loan. It is currently offered exclusively by 55places and is an FHA insured loan. As the name implies, it is only available to borrowers age 62+, and they may not have any other FHA insured loans concurrently. For married couples, only one party needs to meet the age requirement. Essentially, the borrowers put down a substantial portion of the cost of the home, and the lender provides the remainder and requires no further payments from the borrowers. The required down payment depends on the age of the youngest borrower and the purchase price of the home. As age increases, the down payment decreases.The borrowers are responsible for property taxes, insurance, HOA fees, and maintenance, as they would be for either of the first two options. Meanwhile, interest accrues on the debt.
The borrowers have the use of the home for the remainder of their lives or until the last person dies or vacates the home.Their heirs will have the option to sell the home to pay the debt, surrender the home which will satisfy the debt, or pay the debt from other assets and keep the home.
A recent example of a 62+ loan we evaluated had a 65-year-old single male putting up $186,000 (i.e., 53%) to buy a home valued at $350,000. If he had been considering an outright cash purchase, he would now have $164,000 that he could invest and keep as a reserve for emergencies. This could provide both a psychological and practical benefit. On the other hand, if he put 20% ($70,000) down and financed the remainder ($280,000), he would have a substantial monthly payment that would eat into his investments.
If potential borrowers do not place a high value on having home equity upon death, then the 62+ mortgage starts to make sense. Although the underlying interest rate tends to be higher than on a traditional mortgage, the borrowers can rest assured that no matter what happens, the home itself will satisfy the debt, and while they are living in the home, it cannot be taken from them, assuming they are meeting the four obligations mentioned above.
If you are ready to acquire your retirement home, we would be happy to assist you in reviewing your options. Please feel free to email us at advisors@clarityca.com.