Should I cash in my nest egg to buy a house?November 1, 2012: 6:30 AM ET
I am 64 and considering using a large portion of my retirement savings to purchase a HUD-owned home. Those savings are currently enough to support me into my 80s, along with my Social Security benefits. If I buy a home and pay cash, would a reverse mortgage be feasible? — Ken S.
Using a chunk of your retirement savings to buy a home at age 64 is a risky proposition, especially since it sounds like you don't have a great deal of flexibility in your retirement plan. It's also a costly one. Withdrawing a lump sum from your retirement account may push you into a higher tax bracket, resulting in a bigger tax bill next April. Not only that, but you also are passing up the tax-deferred growth those assets will generate over the coming years if they stayed in your account.
And while a reverse mortgage is one potential solution to replace your missing retirement income, Gary Schatsky, a New York City-based financial planner, rarely recommends them for his clients. "Reverse mortgages can be safety valves for people who have no other options," he says, but he adds that they may be the more expensive option in the long run because they often have higher origination fees than other forms of financing and can add additional costs to your overall plan.
You may want to consider renting as an alternative, which can be a less expensive option than buying a house and taking out a reverse mortgage, says Schatsky. Ginnie Mae's Buying vs. Renting calculator (http://www.ginniemae.gov/rent_vs_buy/rent_vs_buy_calc.asp) can help you decide on the more affordable option over time.
If you do ultimately decide to buy a house and take on a reverse mortgage, the Federal Housing Administration — the agency that oversees the HUD home program — provides a reverse mortgage option in its Home Equity Conversion Mortgage program (HECM). If you are at least 62 years of age, you may be eligible for a HECM mortgage that combines the home purchase and the reverse mortgage in one transaction. The HECM program requires that you go through HUD-approved reverse mortgage counseling, however.
— Austin Kilham
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