Empty nesters often no longer need a 2,500 square foot, four-bedroom house. It comes with high maintenance and utilities expenses – costs that will eat into your retirement savings.
But what if you could downsize your property and never have a mortgage payment again?
A reverse mortgage used to purchase a home can do that for you.
Here’s how that plan might be better than selling your home and paying cash for the smaller one.
Reverse mortgage vs forward mortgage vs paying cash: Example scenario
A Home Equity Conversion Mortgage, or HECM (pronounced “heck-um”), is a HUD-sponsored reverse mortgage that can be used to purchase a home.
The so-called “HECM for purchase” could be a great idea depending on your goals.
Take a look at the following chart for a cost comparison of a reverse mortgage, traditional forward mortgage, or paying cash to purchase your next home.
|Reverse mortgage||Forward mortgage||Paying cash|
|Home sale proceeds||$500,000||$500,000||$500,000|
|New home price||$300,000||$300,000||$300,000|
Assumes buyer age of 67, typical closing costs for each program, 20% down for forward mortgage at 6.5%, 61% down for reverse mortgage at variable rate, 1% annual taxes, $750/yr insurance, no HOA.
If your goal is to have minimal debt obligations to preserve your retirement savings, a reverse mortgage is the clear winner.
You can use the proceeds from your home sale, $500,000, to make the down payment on your new home, and finance the rest with a reverse mortgage. This leaves you with $302,000 in cash you can use in retirement.
A forward mortgage leaves you with much more cash remaining since you’re contributing only 20% to the down payment, but most of this will be used toward your monthly mortgage payment.
And if you purchase the home outright in cash, you’ll end up with only $195,000 remaining.See if you’re eligible for a HECM for Purchase.
How does a reverse for purchase work?
A HECM for purchase allows senior homeowners to sell their current home and purchase a new one with no monthly mortgage payment and more cash in their savings.
Similarly to a typical reverse mortgage, an HECM for purchase is based on the homeowner’s age and how much equity they have in their home. It also does not need to be paid back until they sell or leave the home.
The homeowner will have to make a significant down payment on their new home, but will retain more cash than they would by purchasing the home outright.
There are many reasons that a homeowner 62 or older may want to downsize their property with a reverse mortgage, including:
- You cannot comfortably afford the home
- The home is no longer safe, needs a lot of work, or doesn’t suit your needs
- You have just faced a major life change, such as the loss of a spouse, a divorce, or a new marriage
- Your neighborhood is experiencing more criminal activity in recent years
- You want to move closer to friends or family
A reverse mortgage on the existing property will not solve these problems, because seniors must remain in the home to qualify.
How can a HECM for downsizing preserve my retirement savings?
By downsizing with an HECM, seniors will maximize their savings in multiple ways.
Let’s take a look at how this is accomplished.
Less cash needed than paying cash for a home
In our comparison chart example, the cash-purchase homeowner would need to pay $305,000 for their new home, vs. the $198,000 needed for the reverse mortgage purchase.
For a sale with $500,000 in net proceeds, this leaves the cash-purchase homeowner with only $195,000, and the reverse mortgage purchase homeowner with $302,000 in cash.
Because a HECM for purchase doesn’t require monthly mortgage payments, the cash you made from your home sale is yours to keep.
Lower monthly and yearly obligations compared to getting a mortgage
If you get a traditional mortgage to cover the purchase of your new home, you will only be using a small portion of the profit from your home sale.
However, you will need to use this cash to make your monthly mortgage payments.
For a $300,000 home at a 6.5% fixed rate and 20% down payment, you will be responsible for a $1,517 monthly mortgage payment and $310 in taxes and insurance, for a $21,800 yearly cash outflow.
With a reverse mortgage, you only have to come up with $3,720 per year to cover taxes and insurance.Check your eligibility to buy a home with a reverse mortgage.
Lower utility and maintenance costs on the smaller home
Downsizing your property with a reverse mortgage helps homeowners save in multiple ways, including:
- Lower insurance premiums
- Lower utility bills, including heat, electricity, and water
- Lower property taxes
- Less maintenance, especially if you move somewhere with a smaller yard and updated features and appliances
You also may potentially make a profit from selling any belongings prior to downsizing.
Lets you invest the money that would have gone into paying cash for the house, which will grow over time
If you’re purchasing your new home with cash, the bulk of your profit from your old home goes toward your new home.
The cash-purchase homeowner from our previous example is left with a nice chunk of change at $195,000, but it’s not helping solve the problem for seniors who need the maximum savings possible for retirement.
By downsizing a property with a reverse mortgage, the homeowner can use the $500,000 sale proceeds to pay the down payment and closing costs, and the rest will be covered by the reverse mortgage.
If they invest the remaining $302,000 in cash, it has the potential to grow significantly.
Pay off debt more easily
Less monthly expenses, lower utilities and maintenance, and a larger profit from the sale of your old home means you have more cash on hand to pay off your outstanding debts.
Of course, less debt = more savings.
What are the reverse-mortgage-for-purchase requirements?
Borrower requirements for a reverse mortgage for purchase are similar to a reverse mortgage:
- Must be age 62 or older
- Must have significant equity
- Eligible property types include single-family homes, multi-family homes, HUD-approved condos, townhomes, and planned unit developments (PUD)
- Home must be the borrower’s primary residence
- Down payment amount ranges from 45-70%, depending on borrower’s age, interest rates, and price of the home
- Closing costs and fees
- Reverse mortgage counseling
- Minimum credit score, income, and asset requirements set by lender
The borrower is also responsible for paying property taxes, homeowners insurance, and any ongoing property expenses or maintenance.Start your reverse mortgage to downsize your home.
Who can benefit the most from downsizing their property with a reverse mortgage?
The bottom line is that an HECM for purchase can offer seniors greater financial freedom, especially if they have been tied down by their current mortgage or other debts.
Seniors who are still paying for a mortgage often have experienced financial troubles at some point in their journey, whether it be health struggles, job loss, or helping their adult children.
The reverse mortgage conversation also typically involves adult children wondering how to help their senior parents who are struggling financially, or wondering how to keep their parents safe in a large home that requires regular maintenance.
Reverse mortgages can help families enjoy their precious time together, rather than entertaining legitimate fears about where they live and whether they can afford it.
No. It’s a non-recourse loan, so the heirs will not be responsible for paying the difference between the remaining balance and the home’s value. Instead, the federal government can return the home to the lender.
When the homeowner passes away, heirs may choose to refinance and keep the home, pay off the loan with cash, sell the home and keep the leftover equity, or simply forfeit it to the lender if there’s no equity left.
You could lose your home if you fail to pay back your loan if you move, or if you fail to pay your taxes, insurance, or maintain your home according to FHA requirements while you reside there.
Rest assured your lender will be in contact with you if they notice you are not paying taxes or insurance. If you are struggling financially, make sure you discuss your options with your lender so they can work with you to find a solution.
Yes, you can sell your home. If you do, you will have to pay back the total loan amount.
Find out if you qualify for a HECM for purchase
An HECM for purchase isn’t right for everyone, but it has helped many seniors gain greater financial freedom and access a better quality of life in retirement.Get started to find out if a reverse mortgage for purchase is right for you.