Have you been thinking about finding a smaller house that suits your need, moving closer to family or retiring in a warmer climate?
If you are planning for retirement, there’s a chance you’re thinking about freeing up some of the money you’ve accumulated in your home.
Downsizing will be an option for those who want to move and access more of their home equity. Usually, this would require selling their home with one transaction and purchasing a new home with another.
Using a traditional mortgage system to achieve this, there will also be monthly mortgage payments in addition to other expenses. Sounds like a hassle, right?
Let’s look at a better approach to this.
A Built-In, Two-For-One Kind of Deal
Reverse for purchase or HECM is a special type of reverse mortgage that allows qualified Americans, aged 62 and above, to purchase a new home with no monthly mortgage payments.
This special type of reverse mortgage is a federally insured loan built to help older adults reach their financial goals when buying a new home. Instead of downsizing (having to go through multiple transactions and stress of having new monthly payments), you can buy a new home with one transaction and no monthly mortgage payments.
To have access to this benefit, you’ll provide a down payment using your savings or money from the sale of your current home. This provides equity for a reverse mortgage to cover the rest of your new home’s value.
The down payment is usually less than half of the new home’s value. This means that if you want to downsize using a reverse mortgage, you could sell your home and invest in a more modest property for half its value with no monthly mortgage payments. For as long as you live in the new home as your primary residence, the reverse mortgage will not come due. However, interest will increase slowly, just like any other loan.
If for any reason you choose to sell the home or move out, the reverse mortgage will come in due, and the loan will need to be repaid. However, since it is a federally insured loan, you will always be protected, no matter what the loan balances become. It does matter if it exceeds the value of your home, you will be able to repay the loan in full by selling the home.
The Reverse Mortgage Lets You Do Both
When people compare getting a reverse mortgage to downsizing, they talk as if they have to do either one or the other. But the reverse mortgage is a flexible loan – it allows you to purchase a new home while accessing the money in your old home, so there’s nothing stopping you from selling a high-value home and then using your reverse mortgage to buy a smaller home. Doing so allows you to bypass monthly mortgage payments.
When you do this, you won’t have to deal with repaying the reverse mortgage until it comes due, thus making it a great tool for downsizing and preparing to settle in for retirement.