Have you dreamed of purchasing a vacation home but wondered if you could buy a second home with a reverse mortgage? If so, it's time to quit dreaming and start making calculations because you can indeed use the proceeds from a reverse mortgage to purchase a second residence.
Buying a Second Home with a Reverse Mortgage
You'll need to have substantial equity in your primary residence in order for this strategy to work, as only primary residences qualify for reverse mortgages. Depending on the amount of money received from the reverse mortgage and the price of the vacation home being considered, it is possible that a vacation home could be bought outright. In cases where the reverse mortgage proceeds won't pay for the vacation home in full, it may be possible to take out a traditional mortgage on the vacation home for the remaining amount of the purchase price.
You will need to make sure you read the fine print of your reverse mortgage. For instance, it is imperative that the vacation home will remain a second home, rather than become a primary residence. If you do not follow the rules of your reverse mortgage and lose primary residence status on your original home, it will likely count as a maturity event according to the National Reverse Mortgage Lenders Association. The maturity event would allow the bank to require repayment of the reverse mortgage according to the terms of the loan. If the reverse mortgage is not repaid, the bank could foreclose on your home.
Why Would Someone Want to Buy a Vacation Home with a Reverse Mortgage?
Not everyone wants to leave their primary residence or a large inheritance to their future heirs. Using a reverse mortgage to buy a vacation home will allow you to enjoy the money you worked so hard to earn over your life. You can share that joy with friends and family since the second home could easily be used by others when you are not using it.
Additionally, mortgages aren't always easy to obtain for vacation homes. For instance, some condominiums commonly used as vacation homes may be classified as condo-tels, a type of condo in which the majority of the units are rented on a short term basis. Some banks refuse to issue standard mortgages in condo-tel buildings, which can result in either a more expensive mortgage or a more difficult mortgage process. Another common mortgage problem can pop up if you are considering buying a vacation home in a foreign country. It may be difficult to secure a mortgage on the desired property depending on the local real estate market and local customs. Using a reverse mortgage to buy a second home could allow you to avoid getting a mortgage on your future vacation home altogether, either saving money on the mortgage or the headache that would have been spent trying to obtain a non-standard mortgage.
Not a Smart Move for All Seniors
Not everyone that qualifies should consider buying a second home with a reverse mortgage. If you couldn't afford a vacation home without a reverse mortgage, you may be stretching yourself too thin. Reverse mortgages are traditionally used to help seniors afford retirement if they don't have the means to do so without tapping their home equity. Using that money to buy a luxury, such as a vacation home, could be financially irresponsible in many cases. However, if your finances are in good shape and you've been dreaming of a vacation home, you can technically use the proceeds from a reverse mortgage to buy a second home. Just make sure to get multiple quotes to get the best deal possible on your reverse mortgage.