Right-Sizing Your Home Through Your Mortgage
It's no surprise that here at the beach we get a lot of home buyers looking to downsize. The kids have moved out and frankly, they're tired of shoveling snow and freezing all winter long! Many families have vacationed along the Grand Strand for years and it becomes a natural choice for many to retire. Housing is affordable, the beaches are beautiful, the weather is great, and we have some incredible options for active senior living! (Check out this incredible selection of Homes for Sale in 55 Plus Communities!) Add to that, you've got more space than you need and more rooms than you care to heat and clean. If you've thought at all about downsizing, then you're in good company.
The problem is that the path to a more manageable home for these transitional years isn't always clear. Traditionally, downsizing meant selling your home and then purchasing a smaller one, with some or all of the proceeds from the sale of your larger home.
Depending on your equity, the market, and the condition of your home, you could stand to profit from downsizing in the traditional manner. But there are other options, specifically using a reverse mortgage to purchase a new, smaller, more manageable home. Read on to find out if this is the solution for you, once you're ready to have less space to manage.
A Reverse Mortage
Although you may not know the specifics, you've probably at least heard of a reverse mortgage, or HECM ( Home Equity Conversion Mortgage.) For the most part, people use this option as they get older to pull equity out of their homes, without having to sell the property. Anyone with a fixed income or limited retirement savings can tell you that being able to access a portion of the equity in your home without having to sell it and move is a great way to supplement your retirement.
But what many people don't know is that you can use a reverse mortgage to purchase a new home. A HECM for Purchase basically works like a conventional HECM, but it allows you to purchase a home without having to make mortgage payments, leveraging the equity in the home against the day when the loan comes due. This is typically when you sell the home, leave the home for other living/care options, or pass away.
Using a Reverse Mortgage to Purchase a Home
In order to qualify for a HECM, you have to be at least sixty-two, just like with a regular reverse mortgage. You also have to make a down payment of about one-half of the purchase price, which seems huge, but it is typically done with the proceeds from the sale of your prior home. You get a lump sum at a fixed-rate and can put some of the proceeds aside as a line of credit (if you choose an adjustable-rate loan), paying interest only on what you use.
The money you pay up front serves as your equity in your home and will be consumed by the loan in lieu of mortgage payments the longer you live in the property. The interesting thing is that the older you are, the more you can get and the less you have to put down upfront as a down payment to qualify for the loan. It's an interesting way to put the equity you have (or your savings) into a home for your golden years.
Is Using a Reverse Mortgage to Down-Size (or Right-Size?) Your Home a Good Match for You?
Using a reverse mortgage to purchase a home for your retirement years isn't for everyone. They aren't as straightforward as a Conventional Loan, and they aren't as easy as just paying cash from the proceeds of the sale of your former home. But the new home purchased with the HECM doesn't accrue any equity. At the end of the day, that's the trade-off for having a no-payment loan.
We highly recommend speaking with a Mortgage Lender/Specialist in order to help you identify the best way to finance your Retirement Home.