If you’re 62 or older, you might be thinking about downsizing. Perhaps you’re preparing to retire and travel, and you don’t need as much house as you once did.
Or, you’re retiring and want to spend more time with your family or doing hobbies. You’re done spending so much time and money on home maintenance.
But you’ve also seen what’s happening in the housing market. Limited homes available, bidding wars, rising interest rates – you might wonder whether it’s even worth wading into the market right now.
We’re here to tell you that it is – and that a reverse mortgage can be the way to help you do it.
But is a reverse mortgage safe in today’s market? Yes. In fact, it can make you a more competitive homebuyer.
What's in this Article?
A reverse mortgage is a privilege reserved for homeowners and homebuyers who are 62 and older. You can use a home equity conversion mortgage (HECM) on your current home, or you can use a HECM for purchase to buy a new property.
HECM guidelines make the monthly mortgage payment optional, whether you use it to refinance your current property or purchase a new one, as long as you continue to pay property taxes and insurance and maintain the property. You must also stay current with any homeowners association (HOA) fees, if applicable.
The balance of a reverse mortgage comes due when the last borrower or designated non-borrowing spouse moves out of the home or passes away. At that time, the borrower’s heirs can purchase the home or sell it to pay off the loan.
In addition to freeing up cash on a monthly basis, a HECM for purchase can also provide you flexibility in a tough housing market, increase your access to cash, and supplement your retirement income.
Increased home values and listing prices benefit sellers. If your home has appreciated significantly in the past few years, you stand to benefit by selling now.
Depending on your home’s value and whether you are still paying down your mortgage, you may be able to sell the home for a profit.
Then you’ll have cash on hand to purchase a new house, whether you’re rightsizing into a nearby property or moving somewhere new altogether.
If you have cash from your previous home, you have two options as a homebuyer:
- Make an all-cash offer on a property, potentially depleting your funds from the sale of your current home; or
- Purchase the home with a reverse mortgage and keep a safe amount of cash on hand
When you buy a home with a reverse mortgage, you’ll make a sizable down payment – typically 30-70%, depending on your age.
But you will not have to make mortgage payments, as long as you stay current on the property taxes and homeowners insurance and you maintain the home.
That means that with a reverse mortgage, you leave more cash available for your lifestyle needs and for being a competitive buyer.
Let’s say you opt for a reverse mortgage that requires you to put 50% down. You take the 50% out of the sale proceeds from your previous home, leaving the rest in an account.
Then you find the perfect home to rightsize into, but you know it’s likely to receive multiple offers, including cash bids.
Because you’re using the reverse mortgage rather than paying all-cash, you might be comfortable offering above asking, knowing that you have the money available to go above and beyond other buyers.
Here’s where a reverse mortgage becomes especially attractive.
Let’s say you sell your current house for $600,000 and then find another house you like for $400,000.
You could pay for the new house outright with the cash from the sale. Or, you can put down $200,000 (based on a 50% requirement) and leave $200,000 in your savings or investments.
Then you have the option of making a monthly mortgage payment or not. As long as you maintain the property and continue to pay the taxes and insurance, the choice is yours.
Many people opt to make payments on their reverse mortgage while they’re still working to pay down the balance. But as you retire or your expenses and lifestyle needs change, you have the flexibility to keep more money on hand each month to cover medical costs, groceries, travel, or other costs.
Leaving more cash on hand will also come in useful when you move into the new home, as you may then have the budget to hire movers, purchase new furniture, or have the new property landscaped.
Rising interest rates affect how much equity you can tap into with a reverse mortgage.
The lender must follow a formula that considers interest rates, your age, and any outstanding loans on the property to determine how much is available to you.
Here’s another point to consider. Interest will accrue on the reverse mortgage over time. If your heirs want to purchase the home after you move out or pass away, they will have to pay off the balance before they can take possession. The higher your interest rate, the more your heirs will have to pay.
If your heirs plan to sell the home, the interest rate still matters. Again, higher interest means a higher balance to pay off. And that means there is less money left over for your heirs after the sale.
Is a reverse mortgage safe?
Although you don’t have to make a monthly payment (assuming you stay current with taxes, insurance, and maintenance), your interest rate still matters.
Interest will accrue on the reverse mortgage over time. If your heirs want to purchase the home after you move out or pass away, they will have to pay off the balance before they can take possession. The higher your interest rate, the more your heirs will have to pay.
If your heirs plan to sell the home, the interest rate will affect how much they receive from the sale proceeds. Again, higher interest means a higher balance to pay off. And that means there is less money left over for your heirs after the sale.
In today’s market, buyers need any advantage they can get – and a reverse mortgage gives you a serious edge. You’re able to make a strong offer plus leave yourself cash for other expenses and priorities, all while rightsizing into your ideal home for retirement.
Plus, a reverse mortgage can aid in your financial planning and even help protect you from rising inflation.
Is a reverse mortgage safe Key Takeaways:
- A reverse mortgage can help you buy a home while keeping more cash on hand
- You don’t have to make monthly payments on a reverse mortgage, as long as you live in the property the majority of the year, pay the property taxes, insurance, and maintain the home
- You can leverage the sale of your current home to qualify for a reverse mortgage on a new property