When is a Reverse Mortgage a Better Than Using Savings to Purchase a Home?

When a Reverse Mortgage Might Be Better:

A reverse mortgage, particularly a Reverse Mortgage for Purchase, might be advantageous if you want to minimize using your savings for buying a new home. If you own your current home with no mortgage or sufficient home equity, a Reverse Mortgage can offset the down payment for your new home, reducing the need to dip into savings. This approach can help you keep your savings intact for other purposes, like investments or unexpected expenses.

Additionally, with a Reverse Mortgage for Purchase, you won’t have monthly mortgage payments, which can free up cash flow, especially useful if you’re on a fixed income. This is an unexpected benefit, as it allows you to maintain liquidity while still achieving your goal of moving closer to family.

• • Eligibility and Considerations: 
    • To qualify, you must be at least 62 years old, which you meet at 65, and the new home must be your primary residence. You’ll need to make a significant down payment, typically 45-62% of the purchase price, depending on your age, with the Reverse Mortgage covering the remainder. For example, at 65, you might need to provide around 65% of the purchase price, and the Reverse Mortgage could cover about 35%. Closing costs and fees are involved, so it’s important to weigh these against the benefits.

Understanding Reverse Mortgage for Purchase and Savings Options:

• • A Reverse Mortgage for Purchase is a reverse mortgage program that allows seniors aged 62 and older to buy a new primary residence using loan proceeds, with no monthly mortgage payments required as long as they live in the home. The borrower must make a significant down payment, typically covered by using a Reverse Mortgage to avoid using liquid savings, and maintain savings for unexpected expenses. In contrast to selling your current home and using the proceeds, along with additional savings, to buy the new home, potentially depleting liquid assets and having a mortgage payment if both combined don’t cover the purchase price outright.
    • The choice depends on the retiree’s financial situation, the cost difference between the current and new home, and their retirement goals. Below, we outline specific situations where a Reverse Mortgage for Purchase may offer advantages, supported by examples and data from financial literature.

Situations Where a Reverse Mortgage for Purchase Benefits Retirees Over Using Savings:

• Preserving Liquid Savings for Other Purposes:
  • Many retirees prefer to keep their savings liquid for investments, emergencies, or other expenses rather than tying them up in home equity. A Reverse Mortgage for Purchase allows you to use the proceeds from a reverse mortgage on your current home as a down payment, thus minimizing the need to use additional savings. 
  • Benefit Over Savings: Preserves more liquid assets for future needs, such as investments or healthcare costs, which is crucial for retirees concerned about outliving their savings.
• Avoiding Monthly Mortgage Payments:
  • With a Reverse Mortgage for Purchase, there are no required monthly mortgage payments, as long as you maintain the home, pay property taxes, and insurance. This can free up cash flow, which is particularly beneficial if you’re on a fixed income or prefer not to have ongoing housing costs. In contrast, using savings to buy outright means no debt, but if you need a traditional mortgage for part of the purchase, you’d have monthly payments, reducing liquidity.
  • Example: If you buy the new home for $400,000 with savings and need a $100,000 traditional mortgage, you’d have monthly payments, say $500, whereas with Reverse Mortgage, no payments are due until you leave the home, preserving monthly cash flow.
  • Benefit Over Savings: Offers financial flexibility by eliminating monthly housing costs, allowing you to allocate savings to other priorities.
• Maximizing Purchasing Power for a More Expensive Home:
  • If the new home is more expensive than your current home, a Reverse Mortgage for Purchase can help bridge the gap without depleting savings further. The Reverse Mortgage covers a portion of the purchase price, allowing you to buy a home that might otherwise be unaffordable in order to maintain retirement savings and cashflow. 
  • Benefit Over Savings: Enables purchasing a more desirable home closer to family without fully depleting savings, especially if location or size is important.
• Financial Planning and Investment Opportunities:
  • If you believe your savings can generate better returns through investments than the cost of the reverse mortgage (which grows over time due to interest), using a Reverse Mortgage for Purchase might be strategically advantageous. For instance, if you invest the preserved savings at a 5% annual return, it could grow significantly over time, offsetting the growing loan balance of the Reverse Mortgage. This is particularly relevant if you have a long life expectancy and want to maximize wealth.
  • Benefit Over Savings: Allows you to keep savings invested, potentially growing them more than the cost of the reverse mortgage, enhancing long-term financial security
• Long-Term Residence and Cost Spreading:
  • If you plan to stay in the new home for an extended period, the upfront costs of the Reverse Mortgage (closing costs, mortgage insurance premiums) can be spread over time, making it more cost-effective. The lack of monthly payments can also align with aging-in-place goals, especially if moving closer to family is part of a long-term plan. Research suggests that the costs are more justified for longer stays, as short stays might not offset the fees.
  • Benefit Over Savings: Reduces immediate financial burden and aligns with long-term housing plans, particularly if you value stability and community ties.

To further illustrate, here is a table comparing key aspects, assuming a new home cost of $400,000 and current home sale proceeds of $300,000, with the retiree at age 65 (down payment ~65.1% or $260,400):

Down Payment Requirements by Age:

• The following table, shows the typical down payment percentage and dollar amounts for various home values at different ages, highlighting how the required down payment decreases with age, allowing older borrowers to borrow more:

• Note: These figures are estimates and can vary based on interest rates, home value, and other factors.

Additional Considerations:

• While Reverse Mortgage for Purchase offers significant benefits, it comes with costs and risks. Closing costs can be high, including origination fees, mortgage insurance premiums, and title insurance, which might be offset by seller contributions (up to 6% of the home’s cost in some cases). The loan balance grows over time due to compounding interest, potentially reducing inheritance for heirs. Retirees must also continue paying property taxes, homeowners insurance, and maintaining the home to avoid defaulting on the loan.
• In contrast, using savings to buy reduces liquidity, which could impact financial flexibility. If the new home is less expensive than the current home, you might not need a Reverse Mortgage, as the sale proceeds could cover it, preserving savings entirely.

Conclusion

• In summary, a Reverse Mortgage for Purchase is likely to benefit retirees over using savings when they want to preserve liquid assets, avoid monthly mortgage payments, and can afford the down payment (typically 45-62% of the purchase price, depending on age). It’s particularly advantageous if the new home is more expensive, and you prefer to keep savings for investments or emergencies. However, the decision should consider costs, eligibility, and long-term financial goals, with professional guidance recommended for personalized planning.

Reverse mortgages can be a useful financial tool for eligible seniors looking to supplement income, pay for healthcare, or cover living expenses, but they also come with complexities that should be thoroughly understood before proceeding.

Learn more about eligibility requirements for a reverse mortgage, situations where a reverse mortgage is best used, and common myths around reverse mortgage that we debunk with facts