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Downsize to apartment or smaller home in retirement? Look back 15 years to see the future

I recently met with “Helen” as she was in the process of selling her home she had purchased in LA County 30 years ago.  Her home value went up a whopping $600,000 of which she will be able to keep about $300,000 after paying off mortgage and realtor fees.  Helen wants to move closer to her kids, and more importantly her grand-kids in Riverside County.  Helen was faced with a vital decision, should I purchase a home again or “keep all of the money and move into an apartment?”  The retirement picture has changed dramatically in the last 30 years; the survey of consumer finances reported that in 1989 only 20% of homeowners 55 and older carried housing debt, as of 2016 it is now 35%.  Having a mortgage payment in retirement can be quite a burden to bear every month.  Seniors confronting this challenge often prolong their working years and many will eventually choose to sell their home and rent.

Walking away with a large chunk of cash seems like a great way to go into retirement, but it is fool’s gold.  A large chunk of cash can be eaten away by housing cost pretty quickly.  If you received $300,000 out of the sale of your home, at $1,800/month that money would pay your rent for 13 years and 10 months.  To make renting worse, according to the US Dep’t of numbers, average rent prices across the US and specifically in California have gone up 15% over the last 15 years.   So, an apartment you could rent for $1,800 today would cost you $2,070 in 15 years; at this amount your $300,000 would be gone in just over 12 years.  This strategy would leave you with no equity and no home to live in after 12 to 14 years.

Keeping your foot in the California housing market has always been a safe, steady bet.  According to the California Association of Realtors historical housing data, the median price of a detached home in LA & Riverside counties has gone up a whopping 38% from 2000 to 2015!  With the booms and the busts in the California housing market that is an incredible return.  If you cannot afford your monthly housing costs you have options.  Of course, you could work more hours and longer into your retirement to get your mortgage down to an affordable level.  You could refinance and extend out the payoff of your loan by 30 years and lower your payment to a manageable level.  Or you could refinance with a HECM reverse mortgage and eliminate your housing payment altogether and probably get a lump sum of cash or monthly check along with it.  As your home value rises, you can refinance your reverse mortgage and pull out some of that 38% in housing appreciation; the costs on a reverse mortgage refinance are substantially lower as you get a refund for any unused IMIP (initial mortgage insurance premium amortized based on 100 year expected age).  Another option is you can downsize to a smaller, single story home and lower your payment this way.  You can buy a home with a reverse mortgage for purchase; you would be able to move into your new home without ever having to make a monthly mortgage payment.  You still pay your property taxes and insurance and keep your home in proper repair but you would no longer be burdened by having to make that large cash outlay for the mortgage every month.

Looking back in our local housing history is a great way to predict what the future holds for California.  Comparing the effect of 15% rising rents and 38% increases in median home values in the California housing market over 15 years brings clarity to a tough decision.  You can have your home and a large chunk of the equity in it by using a reverse mortgage effectively.  As home values increase, you may be able to pull out more money out of your home.  Any remaining equity passes on to the heir(s).  If there is no equity left in the home upon your demise, the heir(s) have the option of purchasing your home for 5% under the assessed value.  Tapping into the California housing market is a great option for prolonging a safe and happy retirement.  For questions regarding this article or to request a free evaluation, contact Robert Krepps at HighTechLending Inc. at 877-567-7476 or robertloans@msn.com.

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