You probably know that a reverse mortgage can pay you a regular stream of cash while you continue to live in your home. But what if you want to move, perhaps to a smaller house or another town? A reverse mortgage can be used to buy a new home as well. Here's how.
Cash flow is king
If you're a retiree, you might have special concerns about home ownership and cash flow. Your income is probably less than it was when you were working. You may have less cash than you'd like. Reverse mortgages are designed to address these concerns. Here's an example of how you might use a reverse mortgage to maximize your cash flow when buying a new home:
The Joneses want to sell their large family home and move to a location with a lower cost of living, into a smaller home with fewer maintenance issues. Their home is worth about $600,000, and they'll realize $400,000 from the sale. In addition, they have another $100,000 in their IRA.
The Joneses find a nice home in their new town for $400,000. They could use most of their savings to buy it outright. They'll have no mortgage payment, but they'll have almost no cash in reserve, either. They'd feel more comfortable if they could keep some of the proceeds from the sale of their old home and have a larger financial cushion.
The cheapest way to accomplish this would be to just buy the new home with a traditional mortgage -- current mortgage rates make that a very attractive option – put half the money down and get a loan for the rest. Unfortunately, the Joneses don’t have the income or credit rating needed to qualify for a mortgage in today's tough underwriting environment.
One alternative is to buy their new home with a reverse mortgage. They might get their $400,000 home by putting $200,000 down and taking a reverse mortgage with a lump sum distribution of $200,000. That leaves them with no house payment, a $400,000 home, and $300,000 in the bank.
How much can you finance with a reverse mortgage?
The amount of money available with a reverse mortgage depends on the value of the home you’re buying, current interest rates and the age of the youngest borrower. HUD links to a reverse mortgage calculator on its site that shows you how much credit you'd be extended if you took out a Home Equity Conversion Mortgage (HECM), which is a government-backed loan and by far the most popular reverse mortgage product.