Can a Reverse Mortgage Help Me “Right Size” or Purchase My Dream Home?

A reverse mortgage can absolutely help you move into your dream home, with the new reverse mortgage it’s more of a strategic tool to leverage your current home’s equity. Here’s how it could work, with an explanation of the mechanics and a practical example.

How It Helps

The key is a specific type of reverse mortgage called the HECM for Purchase (Home Equity Conversion Mortgage for Purchase), offered through FHA-approved lenders This program lets you use a reverse mortgage to buy a new primary residence—say, a bigger house or that dream retirement spot—without monthly mortgage payments. You combine the reverse mortgage funds with your own money (like from selling your current home) to cover the purchase price.

Here’s How it Works:

• • Eligibility: Age 62+, the new home must be your primary residence, and you need to cover ongoing costs (taxes, insurance, maintenance).
  • Funding: The reverse mortgage provides a portion of the purchase price based on your age, the home’s value, and interest rates. You bring the rest, typically from selling your current home, savings, or other assets.
  • No Monthly Payments: Like a regular reverse mortgage, you don’t pay the lender monthly. The loan grows over time and gets repaid when you sell, move out permanently, or pass away.

Why It’s Useful for Upsizing or Dream Homes

• • Boosts Buying Power: If your current home’s sale won’t cover the full cost of a pricier or dream property, the reverse mortgage fills the gap without adding a monthly burden.
  • Frees Up Cash: By avoiding a traditional mortgage payment, you keep more of your retirement income for living expenses or enjoying the new place.
  • Flexibility: It works for upsizing, or relocating, as long as it’s your primary residence.

Limitations

• • Down Payment Required: You’ll need a hefty chunk upfront—often 45-60% of the new home’s price—since the reverse mortgage won’t cover 100%. The older you are, the less you need to put down..
  • Equity Trade-Off: You’re borrowing against the new home’s equity from day one, so it shrinks over time as interest accrues.

A Practical Example

• • Let’s say you’re 70, living in a $300,000 home you own outright, and your dream home is a $500,000 lakefront cottage. You want to move there without monthly payments.
  • You sell your $300,000 house, netting $280,000 after fees.
  • At 70, with current rates, you might qualify for a reverse mortgage covering up to $220,000 of the $500,000 purchase price. You’d need to bring the remaining $280,000—which your sale covers perfectly.
  • You buy the cottage. The lender puts up $220,000 via the reverse mortgage; you pay $280,000 from the new home.  No monthly mortgage payments—just taxes ($4,000/year) and insurance ($1,500/year).
  • Over Time: You live there 15 years. The loan balance grows to $350,000 with interest. If you sell or pass away, the home is now worth $600,000, which covers the $350,000 debt, leaving $250,000 for you or your heirs.

Does It Fit Your Dream?

• • It’s ideal if you’ve got equity in your current home and want to avoid monthly payments in the new one. The catch is having enough cash upfront for the difference. If your dream home’s way pricier than your current one, you might need extra savings. 

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