Did you know that you can eliminate your mortgage payments by downsizing your home with a reverse mortgage?
Reverse mortgages are growing in popularity among those 62 and older because they allow borrowers to access the significant equity in their homes while halting monthly payments.
What's in this article?
A reverse mortgage for purchase takes things a step further by allowing borrowers to purchase a smaller home with no monthly mortgage payment and additional cash remaining.
Read on to learn how to take advantage of a reverse mortgage for purchase.
What is a reverse mortgage?
A reverse mortgage is a unique loan product created for seniors aged 62 and older.
The most common type of reverse mortgage is called the Home Equity Conversion Mortgage (HECM).
This loan is backed by the U.S. Department of Housing and Urban Development (HUD), which protects borrowers and their heirs.
Reverse mortgages allow seniors to tap into their home equity and eliminate their monthly mortgage payments for as long as they remain in the home.
For those who have paid their mortgage diligently for several years and have more than 50% equity built up in the home, it may be a good time to reap the rewards.
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How does a reverse mortgage work?
Traditional mortgages are “forward” mortgages. Homeowners build equity in their homes as they make their monthly payments.
On the other hand, a reverse mortgage pulls (or makes withdrawals) from this equity.
As long as you live in the home, you do not have to make monthly payments. The only payments you’re responsible for are taxes, insurance and home maintenance.
Payments become due if you move out of the home.
So, how do you leverage a reverse mortgage to downsize? The key to downsizing with a reverse mortgage is using a reverse mortgage for purchase.
How to downsize using a reverse mortgage for purchase
A reverse mortgage for purchase allows homeowners who are 62 and older to sell their current home and purchase a new one with extra cash remaining and no monthly mortgage payments.
Here’s a brief rundown of how it works:
- The borrower’s current home is sold.
- Proceeds from the sale are used to make a large down payment on a new home.
- The rest of the home is paid for with the reverse mortgage.
- The rest of the cash proceeds from the sale of the home are used to supplement the borrower’s retirement income.
By leveraging equity, the borrower will end up with more cash left over than if the property was bought outright or if it was purchased with a traditional mortgage.
As is the case with the previously-mentioned “regular” reverse mortgage, homeowners are not responsible for repaying the loan until one of the following occurs:
- They move out
- They pass away
- They sell their home
- They stop paying their taxes and insurance
- They stop maintaining the home
If the homeowner passes away, the heirs can sell the home, pay for it with cash or refinance the home and keep it.
They also have the option to give it to the lender if there is no equity remaining or if they don’t want to be responsible for the home. This is how a HECM for purchase protects heirs.
Benefits of downsizing using a reverse mortgage
For the right borrower, downsizing with a reverse mortgage has numerous benefits, including:
- Retaining more cash from their original home’s sale, which can be used in retirement or invested
- Saving money on utilities, taxes and maintenance by downsizing to a smaller home
- Using the cash to consolidate debt
- Protecting themselves and their heirs if the home happens to be worth less than what is owed when the balance comes due
Who is the ‘right borrower’ for a reverse mortgage for purchase?
There are multiple reasons a borrower may benefit from downsizing with a reverse mortgage.
Some are no longer able to comfortably afford their home, while others have homes requiring significant repairs.
A homeowner may be facing a life change such as a divorce or loss of a spouse, or may want to move closer to family.
Whatever the reason, seniors struggling with existing debts may long for financial freedom. A traditional reverse mortgage won’t help in this example, because the borrower would need to remain in the same home with the same financial responsibilities.
For seniors in these common scenarios, a reverse mortgage for purchase can check all of the boxes:
- Provide extra cash
- Eliminate mortgage payments
- Allow for downsizing to a new home better suited to their needs
How to qualify for a reverse mortgage for purchase
To get a reverse mortgage, you will have to meet certain borrower requirements and apply with an experienced lender.
General requirements for a reverse mortgage for purchase include:
- Homeowners aged 62 or older
- Significant equity available
- Home is primary residence
- Property is an eligible type (including single-family homes and other approved properties)
- Borrower completes reverse mortgage counseling
- Down payment of generally 50% or higher, depending on the borrower’s age, the price of the home and the interest rate
- Closing costs and fees
Borrowers must also meet the credit score, income and asset requirements set by the lender.
Apply for a reverse mortgage today with Compass Mortgage
If you think a reverse mortgage is the perfect solution for helping you downsize, apply now with Compass Mortgage.
Compass Mortgage is your home to a better mortgage experience because our work ethic and results set us apart.
As you navigate challenging personal decisions about your home, we promise to be your partner and advocate throughout every step.
Reach out to our team for any questions you have about starting the reverse mortgage process.
We look forward to hearing from you!
Photo by Tierra Mallorca on Unsplash