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How You Can Use a Reverse Mortgage to Buy Your Dream Retirement Home
By Gabriel O Rodriguez MONEY RESEARCH COLLECTIVE
Retirement is your chance to finally settle into a space that caters to your lifestyle, preferences and future needs. But financing that perfect retirement home can be tricky — especially if you’re on a fixed income. One option gaining traction among retirees is using a reverse mortgage to make that dream home a reality.
Read on to learn how reverse mortgages work, how they can help you purchase a new home and whether this option makes sense based on your retirement plans.
What is a reverse mortgage?
A reverse mortgage allows homeowners aged 62 and older to tap into their equity without having to make monthly mortgage payments. Instead of paying the lender, the lender pays you, based on the value of your home. You must repay the loan, plus interest, if you sell the property or move out. Your heirs will be responsible for repayment if you pass away, using their own funds or the proceeds of the home’s sale.
A Home Equity Conversion Mortgage (HECM) is the most common reverse mortgage product. This type of reverse mortgage is insured by the Federal Housing Administration (FHA) and can provide financial flexibility in retirement. It does so by converting your home equity into cash flow via monthly payments, a line of credit or a lump sum.
There are also proprietary reverse mortgages that are offered through private lenders. These loans don’t have to adhere to rules set by the government for HECMs, so they often have more flexible terms, particularly around loan and age limits.
How does a HECM for Purchase work?
The HECM for Purchase (H4P) program takes the concept of a reverse mortgage and applies it specifically to purchasing a new home. Here’s how it works:
- You provide a substantial down payment, typically at least 50% of the purchase price.
- The reverse mortgage covers the remainder of the purchase price.
- No monthly mortgage payments are required. The loan balance increases over time as interest accrues, but you don’t have to make payments as long as you meet the terms of the loan.
The H4P program allows retirees to buy a new home without depleting all of their savings or taking on the burden of monthly mortgage payments.
How does proprietary reverse mortgage for purchase work?
Homeowners looking at more expensive properties, like those who live in high cost of living areas, may want to consider a proprietary reverse mortgage for purchase. These products have higher borrowing limits than a standard reverse mortgage, with many lenders offering loans up to $4 million.
The process of buying a home with a proprietary reverse mortgage, often called a jumbo reverse mortgage, is similar to the HECM for Purchase program. You’ll need to provide a significant down payment, which often comes from the sale of your current home. Then the reverse mortgage covers the remainder of the price.
Is a reverse mortgage a good way to purchase your retirement home?
While the idea of buying your dream home without monthly mortgage payments sounds ideal, it’s important to weigh the pros and cons before making a decision.
Advantages of using a reverse mortgage to buy your dream home
- Avoid monthly mortgage payments: The most obvious benefit is that you won’t have to worry about mortgage payments for the rest of your life, as long as you meet the program’s requirements.
- Preserve cash flow: By using the HECM for Purchase program, you can keep more of your retirement savings intact rather than spending it all on a home purchase.
- Downsize or upgrade with ease: If your current home no longer fits your needs — maybe it’s too big or doesn’t have the amenities you want —reverse mortgages for purchase allow you to move into a more suitable home with minor financial strain.
- Stay in your new home for life: As long as you live in the house as your primary residence and maintain the property, you won’t be required to make mortgage payments or pay off the loan.
Disadvantages of using a reverse mortgage to buy your dream home
- Reduced home equity: The loan amount increases over time, which means the equity in your home decreases. This could leave less for your heirs when the home is eventually sold or limit your ability to refinance later.
- Upfront costs: Reverse mortgages, including HECM for Purchase loans, come with their share of upfront costs. These include origination fees, closing costs and mortgage insurance premiums.
- Less flexibility: While reverse mortgages can be a great tool for older adults buying a home, you must live in the home as your primary residence. Moving or renting out the property would trigger the loan’s repayment.
- Inheritance impact: Since the loan is likely to be repaid through the home’s sale, your heirs may inherit less wealth or have to sell the home to satisfy the loan balance.
How do I qualify for a reverse mortgage to buy a retirement home?
To qualify for a reverse mortgage for purchase, you must meet the following requirements:
- Age: You must be at least 62 years old for a HECM, or at least 55 years old for a proprietary reverse mortgage. (The minimum age for the proprietary products varies by state.)
- Equity or down payment: You must provide a significant down payment, typically at least 50% of the home’s purchase price. This down payment may come from personal savings, the sale of your current home or other financial resources.
- Primary residence: The home you are purchasing must become your primary residence, meaning you plan to live there for at least six months out of the year.
- Property requirements: The property must meet FHA requirements, including being a single-family home, an FHA-approved condo or a one- to four-unit property where you live in one of the units.
- Financial assessment: The lender will perform a financial assessment to ensure you can maintain the home, pay property taxes and homeowners insurance, and keep up with basic maintenance.
Summary of How You Can Use a Reverse Mortgage to Buy Your Dream Retirement Home
Financing a home purchase with a reverse mortgage can be a strategic way to buy your dream retirement home while preserving your financial flexibility and eliminating monthly mortgage payments. However, it’s essential to consider the trade-offs, like reduced equity and upfront costs, to ensure the program aligns with your long-term goals.
If you’re considering using a reverse mortgage to buy your retirement home, consult a financial advisor or reverse mortgage specialist to understand the full scope of the program’s benefits and drawbacks.