A reverse mortgage loan allows homeowners 62 years and older to access the equity in their primary residence.
The Federal Housing Administration (FHA) insures reverse mortgage loans through its Home Equity Conversion Mortgage (HECM) program.
Borrowers who take out a reverse mortgage are able to use their proceeds however they choose. They can pay for in-home care or even purchase a second home if they would like.
Seniors who live in a colder climate may prefer to spend time in places like Florida, Arizona, or California during the winter to get out of the cold.
Here is a quick example of how it could work. A 72-year-old borrower who owns a $500,000 home takes out a reverse mortgage on their primary residence and has access to $322,723 after closing.
The borrower could use the money to purchase a second home in Florida for $200,000 and still have $122,723 left over in reverse mortgage proceeds from the primary residence.
One important thing to consider is that in order to satisfy your reverse mortgage requirements, your second home cannot turn into your primary residence. The Department of Housing and Urban Development requires that HECM borrowers who obtain a reverse mortgage occupy the home as their primary residence.
Borrowers should also consider whether they can afford to make an extra mortgage payment and keep up with the taxes and insurance required on their primary residence and second home.
Home values across the country have been hit hard during the economic downturn, which could make it a great time to purchase a second home.
In areas such as Florida and Arizona, home prices are down 48% from their peak, according to a report from CoreLogic published in May 2012.
There is a large segment of baby boomers who are interested in purchasing a second home, according to a survey from Coldwell Banker Real Estate. The survey found that 34% of agents said younger baby boomers (ages 47-55) are interested in purchasing a second home. Older boomers are a little less interested, with about 22% of older baby boomers (ages 56-64) interested in purchasing a second home.
In addition to lower home values across the country, mortgage rates are experiencing 60-year record lows. Zillow reported in July that 30-year fixed rate mortgages are at 3.35%, the lowest the company has ever seen since it began tracking mortgage rates in 2008.
Even though it might be an attractive time to purchase a second home, it’s important to seriously consider whether you can afford the additional financial obligations.
A reverse mortgage is a serious financial decision and it’s important to use the equity in a way that is beneficial during your retirement years.
Have a question about using a reverse mortgage to purchase a second home? Don’t hesitate to reach out to us today.