While it has commonly been thought that you could only use a reverse mortgage to refinance a home that you already own, as it turns out, there are also ways that you could potentially use it to buy a retirement home instead.
In the past, a reverse mortgage was a commonly considered a tool that could be used to tap into the existing equity of your home. But it is also a possibility that you can use this same method to buy a home, too. It's a candid idea for people who would like to relocate to their retirement home but who don't want to be straddled with mortgage payments. Or for persons who are already in retirement and would not qualify for a conventional mortgage. It can also be used to delay your Social Security payout or to help you preserve your retirement nest egg.
A reverse mortgage works by the bank agreeing to pay you out on a predetermined value of your home. This money can be issued in a lump sum, in the form of monthly payments that slightly increase each year or as a line of credit. To qualify, you must be 62 and reside in the home as a primary residence.
So, let's say that you have a nice retirement portfolio already in place. And let's also say that you wanted to invest in a home but have no monthly payments. When buying a home with a reverse mortgage, you'd have to have at least 50% in the form of a down payment. A house that is valued at $600,000, for example, would require at least $265,000 as the down payment. The transaction would be similar to a conventional home purchase, except that you would not need to qualify financially for the remaining portion, as that would be qualified under the reverse mortgage.
When you do pass away, the home would be sold at market value. Since you'd already have paid down over half of it, you'd be able to leave a nice amount of funds for your heirs to inherit. Of course, there is interest and fees to factor into this equation, and this unique situation would not be feasible for everyone.
Experts advise that you shop around. And that you carefully weigh this financial prospect. Consult with an experienced financial advisor beforehand to assure that this move is in your best interests.