Is it a Good Fit for You?
Many Baby Boomers have asked about using a Reverse Mortgage to purchase a retirement home, whether it is a better choice than using a conventional loan.
Turns out that it depends on your situation. The best course of action is determined by the home location and price, your financial circumstances and and your retirement goals.
Let’s Dispel Misconceptions
First, A reverse mortgage is NOT a zero down payment option like a VA loan. It is not even a minimum down payment option like those offered by many government-backed conventional loans. As Google states:
With a traditional mortgage, monthly principal and interest payments are required. This builds equity as the loan is paid down. When a reverse mortgage Home Equity Conversion Mortgage (HECM) is used for purchase, however, the required down payment is between approximately 45% and 62% of the purchase price, depending on buyer’s age or Eligible Non-Borrowing Spouse’s age (62+), if applicable.
Given the large down payment requirement, what are the advantages of using a reverse mortgage to buy a home? Quite simply, once escrow closes, no loan payments are required as long as a surviving spouse lives there. If you have sold your family home and can use some of that profit to buy a property as your final retirement abode, then it is a nice feeling to know that you will never have to make a home loan payment again. Plus, it’s a non-recourse loan that’s backed by the FHA, so you won’t have to pay back more than the value of the home (even if the loan balance is higher). And if one spouse dies while living there, the surviving partner can continue to live there under the same terms. In short, a HECM loan provides peace of mind during retirement while freeing up more monthly income for necessities or simply enjoying yourself.
There’s more good news. Neither your credit score nor your household income will affect your chances of qualifying for an HECM for Purchase Loan. Generally, the older you are, the more money you’ll be able to borrow. A reverse mortgage can also build up equity over time. When the borrower(s) die or move and the property is sold, the loan is paid off first and the remaining equity goes to the sellers or heirs.
Now that doesn’t mean you skate free with everything. Boomers who use a HECM still have to pay taxes, HOA fees, insurance and maintain the property. And you must prove you have enough income to pay these expenses and your other obligations.
Using a reverse mortgage to buy a home works better for higher-priced properties (like those found in California) than for lower-valued homes typically found in rural, sparsely-populated states. In the latter case, monthly loan payments may not be a burden on a retiree’s income and conventional home loans requiring less down payment may make more financial sense. But then again, it depends on one’s goals in making the purchase. Sometimes having a sense of security outweighs financial factors.
For Boomers Who Want to Explore Reverse Mortgages Further
Entering into a reverse mortgage requires serious consideration. They are not for everyone. That’s why a counseling session is required for buyers before commiting to a loan. Here are a few quick reads where interested Baby Boomers can learn more:
A Purchase Example
About five years ago, some friends of mine – let’s call them John and JoAnne Smith – moved from Carlsbad, California to Bellingham, Washington to be closer to family. They lived there for five years and enjoyed seeing their grandkids graduate from high school. But eventually, the harsh winters resulted in a desire to spend their retirement years in a warmer climate. So they sold their “free and clear” home in Bellingham and fell in love with a beautiful place in California close to the ocean and surrounded by shops, restaurants, golf courses, and other amenities.
As expected, moving from Washington to California meant they faced higher home prices. This was certainly true for the upgraded property they wanted to buy, a place they would otherwise never be able to afford.
Since this is to be their final destination, John also wanted to ensure that JoAnne (who is quite a bit younger) would not have to sell their home or worry about loan payments when he goes off to that great golf course in the sky. So they decided to invest much of their proceeds from selling the Bellingham home and contacted a friend (who just happened to be a mortgage broker) to sheppard them through the reverse mortgage process. Forty-five days later, they became the proud owners of their dream home. Now they reside in a quiet, peaceful area a short drive from the beach, enjoying life to the fullest because they also have more disposable monthly income.
Are Reverse Mortgages a Good Vehicle to Buy a Retirement Home?
Whether a reverse mortgage works for you depends of your unique situation. We recommend doing the math for both a reverse mortgage and a conventional loan to see which yields the best outcome for you. Reverse mortgages are variable rate loans and you may be able to get a low-interest, fixed-rate loan with ten percent down through conventional means that is a better answer for your needs.
On the other hand, if you have the money to put about fifty percent down on a home, a reverse mortgage could be the way to go. There is no need to worry about your credit score or satisfying traditional financial qualification criteria. When living on a fixed income (as most Boomers are), it allows one to acquire an otherwise unaffordable home while also achieving peace of mind. And having extra spending money each month never hurts.