Using A Reverse Mortgage to Upsize, Downsize, or Fly South for the Winter

by

Amy L. Catling, C.S.A.
Reverse Mortgage Specialist
GIA Mortgage Corp.
1-207-251-0633
1-800-476-2858
acatling@seacoastreversemortgage.com

Reprinted with permission from The Senior Times newspaper

Until 2009, it was not possible to utilize a reverse mortgage to purchase a primary residence. That changed with the passage of the Housing and Economic Recovery Act of 2008, which went into effect on January 1, 2009.

Until the availability of a federally insured reverse mortgage for home purchase, a reverse mortgage was generally advisable only for those who wished to remain in their current home for as long as possible. Many adults who are 62 or older and eligible for a reverse mortgage, however, are ready to upsize, downsize, move closer to friends or family, or move to a warmer climate. Understanding this, Congress created the option of using a reverse mortgage to assist in funding such a move.

The purchase of a home and the reverse mortgage are accomplished during one transaction rather than two. Other than needing to come up with the difference, if any, between the home purchase price and the amount allowed by the reverse mortgage, qualifying for the reverse mortgage for home purchase is the same as qualifying for any federally insured reverse mortgage. Though reverse mortgage borrowers can spend up to six consecutive months living elsewhere, the newly purchased home must be designated as the primary residence.

For example, let's use the scenario of a widow who is 70 and lives in western Massachusetts, in an area where home values are relatively low. Now that her husband is gone, Ann would like to move closer to one of her daughters who lives in a coastal Maine town, but home values there are comparatively high. Prizing her independence and her privacy, she dearly loves her daughter, son-in-law and grandchildren, but does not want to move in with them. She'd like to buy a home the right size for her, close to her daughter, and all on one level.

She has two options for selling the home in Massachusetts: to sell, possibly while home values are even lower than usual, and use all the proceeds from the sale to purchase a home a Maine. She may not have quite enough to fully pay for the house she wants. In that case, she will then have to go through the process of qualifying for a mortgage for the remainder. This plan of action leaves her with little financial liquidity and monthly mortgage payments.

Another option is to use a reverse mortgage to purchase the home in Maine. Even if she doesn't qualify for enough to fund the new home completely, money from the sale of Ann's original home can easily cover the difference. This choice leaves Ann with a home she loves, no mortgage payments, and almost all the proceeds from the sale of the Massachusetts home now available to be safely invested, providing additional income to be used for things like home improvements and taxes in the future.

Though the example above is of a woman who wants to downsize, purchasing a home with a reverse mortgage can also make the financial difference between buying a home that is acceptable - but not great - and one that is truly a "dream home".

A different way to use a reverse mortgage to simultaneously purchase a second home and a potential asset for adult children is illustrated in the following example:

Recently retired, John and Brenda are 65 and 66 years old. They own a $500,000 home on the New Hampshire coast with no mortgage on it, but they'd like to be able to live in Florida for the winter months.  Though they live comfortably, their budget would be stretched very tight if they added a mortgage payment or rental payments. They are eligible for approximately $200,000 with a reverse mortgage. With single home and condo prices low in Florida, they would be able to use some of that reverse mortgage to purchase a home outright in an area of Florida that they enjoy. For many years to come, Brenda and John, their adult children, and their grandchildren will be able to enjoy a vacation home in a warm climate. The home in Florida will then pass free and clear to their children when the two of them are gone.

Lastly, seniors buying a primary residence with a reverse mortgage are eligible for the 2009 First Time Homebuyers tax credit. This is a tax credit totaling 10% of the purchase price of the home with a maximum credit capped at $8000. The amount may be less depending on the purchase price of the house.

To ask specific questions about how a reverse mortgage can fit in with how you'd like to live in retirement, you can reach Amy Catling at 1-800-476-2858 or 1-207-251-0633 or by email at acatling@seacoastreversemortgage.com.

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