Reverse mortgages are desirable by retirees interested in downsizing their home because they provide a way to eliminate all monthly mortgage expenses, thus reducing retirement expenses.
How it works
Officially known as a Home Equity Conversion Mortgage (HECM), is available to qualifying seniors, age 62 or older. Essentially, the equity that has been built in the retiree’s home is converted into cash used to pay off an existing home or to purchase a new property. By using a Reverse Mortgage to purchase a new property, instead of continuing to live in the property you already own, you can bypass the need to ever have a traditional forward mortgage. With a sizable down payment, it is possible to buy your dream home without any monthly payments at all! During the time you are living on the property purchased with a reverse mortgage, there will never be a monthly mortgage payment- the only payment required will be taxes and insurance. However, the mortgage DOES have to be paid back when you (or your spouse) are no longer living.
Drawbacks of using a Reverse Mortgage
The major drawback of using a Reverse Mortgage to purchase a home is that it requires a large down payment- sometimes as much as half of the home’s value. This is set by the value to loan ratio required for a Reverse Mortgage and depends on your age and the value of your property.
Another drawback to using a Reverse Mortgage is the potential adverse effects on your estate. Being that the mortgage must be paid off after the passing of the homeowners, a Reverse Mortgage should ALWAYS be discussed with your family and heirs prior to making the decision.
Finally, Reverse Mortgages can affect the ability to qualify for needs-based programs, such as Medicaid.
Properties that Qualify for Reverse Mortgages
Reverse Mortgages can be used to purchase almost any type of property. Single family homes, town houses, condos, and FHA-approved mobile or manufactured homes can be purchased with a Reverse Mortgage, while Co-ops, bed and breakfast establishments, properties constructed less than one year before the purchase date, and mobile or manufactured homes that have not been certified by the FHA do not qualify.
If a Reverse Mortgage sounds like something that would fit your next step in life, we have many agents who specialize in retirement downsizing. Not only are the experienced in finding the best property for your needs, they will be able to refer you to a lender who specializes in Reverse Mortgages.