There are many options to consider when seniors in Kansas City are trying to make ends meet in retirement. Selling and buying something cheaper is one of the options that many including The Financial Industry Regulatory Authority (FINRA) tells you to consider.
Let's see if this is a "good" option. Let's assume you have a $180,000 house, you want to sell and buy a $90,000 maintenance provided townhome. Your costs to sell are likely to be at least 6% for real estate commissions, plus typical seller's costs, plus any closing costs the buyer may request paid and do you think you will get full asking price? Let's say you get 90% or $162,000.
You pay $90,000 for the townhome, plus $3,000 for closing costs, $2,000 in moving costs so the net is $67,000. The taxes and insurance on the townhome are $170 per month and the association fees are $250 for a total of $420 per month.
So you have paid $18,000 to sell the property, plus another $3,000 in closing costs and $2,000 to move you- that's a total cost of $23,000. That doesn't take into account the lost opportunity cost of investing that $90,000 and $23,000 ($113,000). Investing $113,000 at a 5% after tax for 5 years is a total of $145,000, 7 years $160,238, 10 years $186,112, 15 years $238,848, 20 years $306,528, and 30 years $504,855.
Investing the $67,000 at an after tax 5% would pay that $420 for 263 months (22 yrs 11 months). Or you could take $500 per month for 196 months-16 yrs 4 months, $750 for 112 months- 9 yrs 4 months, $1,000 for 79 months-6 yrs 7 months.
What if instead at the age of 62 you took out a reverse mortgage with closing costs around $10,000 your line of credit (LOC) would be $100,172. You wouldn't have to move, you have no mortgage payment, but you would have to pay about $260 for taxes and insurance let's say another $150 a month to have the yard cared for so the total is $410. (Comparable to the townhome). The costs are only $10,000 vs. $23,000 to move plus you have to move and you are in a much smaller place.
The LOC has a growth function on the open amount and the 20 year average growth rate is 6.54%. So the LOC would have $138,795 available in 5 years, $158,134 in 7 years, $192,310 in 10 years, $266,460 in 15 years, $369,199 in 20 years, and $708,791 in 30 years.
If you assumed the $180,000 house grows at 3% each year, and the net from the house would be 90% when it sold; in just 15 years the amount available in the LOC is $259,081 while the net from the house is $252,390. That is $6,691 MORE from the LOC. So getting a reverse mortgage with a LOC and letting it grow assuming the 20 year average you could cash it out at that time and give the kids more than they would have gotten if they went through the hassle of selling the house. Interesting isn't it?
Funny the media and FINRA didn't mention that when they tell you to sell and buy something cheaper. Before you dismiss something because the media or a "so called" expert tells you something you should get with a true professional and discover for yourself what is the best and cheapest way to go.
Kurt Jackson is a Certified Mortgage Planner with more than 17 years in the industry with an office in Liberty. If you would like to find out more about other options to your retirement years call him at 816-415-1737 or email kurt@kcmortgageplanning.com.
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