With the Nov. 3, 2020 passage of California’s Proposition 19, homeowners age 55 and older can now transfer their home’s Proposition 13 tax savings to a replacement home, including a more expensive one, anywhere in California. The tax break, which can be used up to three times, also extends to California homeowners with severe disabilities and those forced to relocate because of a natural disaster or hazardous waste contamination.
Before passage of Proposition 19, California homeowners age 55 and older were limited to a one-time transfer to a replacement property of equal or lesser value located within the same county or only those counties that accepted the transfers.
For current California residents who are 62 or older, they could also use a reverse mortgage to assist with their purchase of a new home. This option of using a reverse mortgage to purchase another home is known as a Home Equity Conversion Mortgage for Purchase (HECM for Purchase).
The HECM for Purchase offers older homebuyers several advantages. A HECM for Purchase:
- Spares you from putting down all your cash for the new purchase
- Saves you time and expense because it’s one transaction, not two (which would occur if you bought a home, then refinanced to obtain the extra cash you need)
- Eliminates future monthly mortgage payments, although you are still responsible for ongoing property taxes, homeowners insurance, and home maintenance
Eligibility Requirements for a HECM for Purchase
Besides meeting the minimum age requirement of 62 to apply for a HECM for Purchase, you must:
- Own and live in the home as your primary residence (must occupy the home within 60 days of the loan closing)
- Complete a HUD-approved counseling session so you understand the terms and obligations of a reverse mortgage and whether the loan is a good fit for you
- Undergo a Financial Assessment to determine your ability to maintain the home and pay property taxes and homeowners insurance
How the HECM for Purchase Works
Based on several factors including your age and the appraised value of the property, your lender will calculate how much to lend you. As for your down payment, you can contribute funds from your personal savings, assets, or proceeds from the sale of your prior residence.
The financed portion of the loan has an interest rate like any mortgage, but unlike a traditional mortgage, you don’t have to repay your HECM for Purchase until you permanently move away from the home. By not using all your cash to purchase your next home and by eliminating your monthly mortgage payments (providing you comply with all loan terms such as your home maintenance, property tax, and homeowners insurance obligations), you should have more cash on hand for a more comfortable and financially secure retirement.
With the passage of Proposition 19, you now have more financial freedom to move about the state and enjoy a home of lesser or greater value that makes the most sense for you and your family. Furthermore, with a HECM for Purchase, you have a powerful financing tool to preserve cash and create more cash flow so you can enjoy the retirement you have always envisioned.
We hope this article has given you some help with things to think about. Of course, every situation is different. This information is intended to be general and educational in nature, and should not be construed as financial advice.