Lake Wales, FL. The advertisement in Where to Retire magazine caught my eye. It made an interesting offer.
“Purchase a new home in Central Florida’s Premier 55+ community, Lake Ashton, with a one-time down payment around 50 percent of the purchase price and never make another monthly mortgage payment again!”
A little over an hour’s drive from Tampa, this gated community now has 1,300 homes, 36 holes of golf, waterfront lake lots and country club amenities. The homes range from about $200,000 to $270,000 in price and up to 2,500 square feet in size.
But it’s not the homes that drew my attention. It was the use of purchase-money reverse mortgages as a marketing tool. If you are 62, or older, you can now buy a home with a large down payment— that “around 50 percent” figure— and never make a mortgage payment on the remaining amount of the purchase price.
Basically, the purchase-money reverse mortgage is a wrinkle on a conventional reverse mortgage. Known as Home Equity Conversion Mortgages, or HECMs, using one may allow you to pay off an existing mortgage on a home you already own and have an additional line of credit to cover other expenses.
The only requirement: you must have sufficient equity in the home to make the financing possible.
To learn more I visited with Chris Bruser, a home equity retirement specialist at Retirement Funding Solutions, a reverse mortgage originating firm. Mr. Bruser, with ten years of experience in reverse mortgages, knows his product. “That’s a financial planning tool,” he told himself when he first learned about RMs, “I’m going to tell every financial planner I know about this.” So far, it’s been a missionary effort, he says, but the planners are starting to come around as they see how reverse mortgages can improve retirements.
Sitting at his breakfast room table in Tampa, I asked him to tell me how people react when he explains reverse mortgages.
“That’s not what I thought it was,” is their first response, he said. Working through referrals from financial planners, he tells potential clients that they should expect to spend at least an hour with him. He wants to educate them, find out what they want to accomplish and learn about their current situation. While some are using a reverse mortgage as a financial planning tool, he observes, most are still doing it because their home equity is the only major asset that they have.
Their first question, he says, is “Am I going to lose my home?”
His answer: “This is just a mortgage. It’s a new mortgage, but it’s just a mortgage.”
The next big question people ask, he says, is “What happens at the end?”
The question, he explains, has three possible answers. First, a reverse mortgage becomes due, like all mortgages, when the house is sold. Second, it becomes due when the second person in a couple dies. Or, third, it becomes due when the last surviving homeowner has been out of the house for 12 consecutive months.
How much equity is left after sale depends on how many years the homeowners stay in the house, how fully they use their credit line, and the market for their home at the time of sale. People with a glass-half-empty view of the world imagine losing all of their equity. People with a glass-half-full view consider the benefit of having a limited loss in a risky universe. The most they can lose is their home equity. (It helps to remember the recent housing price collapse to appreciate this.)
As a choice, a home equity mortgage can compare favorably with other choices. The credit line, for instance, can be used to stay in the home and receive home-based healthcare. “That, by the way, is probably the main use of the cash,” Mr. Bruser notes.
You can understand the potential benefit with a simple example. Suppose you want to increase your financial flexibility when you retire. You sell your house. You take the equity and find a similarly priced house. Only instead of reinvesting all of your equity, you take out a purchase money reverse mortgage. That leaves you with no mortgage payment. But you’ve still got half of the original equity.
End result? You have more personal liquidity. You have diversified from one hundred percent home equity to real estate and a fund of liquid financial assets. You have limited your exposure to a real estate decline or crash.
It’s a choice worth knowing about.
Scott Burns is the retired Chief Investment Officer of AssetBuilder, the creator of Couch Potato investing, and a personal finance columnist with decades of experience.