Using a Reverse Mortgage to Downsize Your Empty Nest
Right-Sizing Your Home Through Your Mortgage
Has your home started to feel a bit oversized lately? Have your kids long since moved out on their own? Are you getting tired of cleaning rooms that you just don’t seem to use, not to mention paying to heat them? If you’ve thought at all about downsizing, then you’re in good company.
Many older Americans find the need to transition into a smaller home or condo once their child-rearing years have drawn to a close. But the path to a more manageable home for your golden 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, namely 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.
Using a Reverse Mortgage to Downsize
Like many Americans, you’ve probably at least heard of a reverse mortgage, or HECM. Most folks use this device as they get older to pull equity out of their homes, without having to sell the property. As anyone with a fixed income or limited retirement savings can tell you, being able to access a portion of the equity in your home without having to sell it and move can be a great way to supplement your retirement.
But you can also, as many people don’t know, use a reverse mortgage to purchase a new home. An HECM for Purchase works somewhat like a conventional HECM, but it allows you to purchase a home without having to make mortgage payments, banking 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 twelve months, or pass away.
Using a Reverse Mortgage to Purchase a Home
You have to be at least sixty-two to qualify for a HECM for Purchase, just like with a regular reverse mortgage. You also have to make a down payment of about one-half of the purchase price—typically done with the proceeds from the sale of your prior home. You get a lump sum at a fixed-rate and can set 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 the home and will be eaten up by the loan, in lieu of mortgage payments, the longer you live in the property. But the older you are, the more you can get and the less you have to put up as a down payment to qualify for the loan. It’s a terrific way to put the equity you have (or your savings) into a home for your golden years.
Is Using a Reverse Mortgage to Right-Size Your Home Right for You?
Using a reverse mortgage to purchase a home for your retirement years isn’t for everyone; as they say, “the devil is in the details.” A HECM for purchase can help some seniors access the equity they have tied up in their homes, but the new home purchased with the reverse mortgage doesn’t accrue equity. At the end of the day, that’s the trade-off for having a no-payment loan.