57 percent of Baby Boomers plan to move out of their current home, according to a recent survey from Better Homes and Gardens. How will almost 44 million Boomers afford moving into the home they believe will be the best they have ever lived in? Peter Andrew of LendingTree shows how downsizing and reverse mortgages can help this generation make the most of their retirement years.
Should the reverse mortgage form part of baby boomers’ retirement plans? As always with financial questions, the answer depends entirely on personal circumstances.
Baby Boomers and Downsizing
The AARP estimates that between now and 2029, younger Baby Boomers will be reaching the magic age of 65 at a rate of roughly 8,000 a day. Some Boomers can look forward to retirements that really will be their golden years. Others may face the opposite: decades of grinding poverty. Any of them might find downsizing (moving to a smaller home) an attractive prospect for many reasons, including:
- A smaller home might mean a smaller mortgage — or no mortgage at all.
- Selling an expensive home and buying in a cheaper area could beef up bank balances.
- Moving somewhere with a kinder climate could provide a more pleasant retirement — and reduce heating bills.
- Potential mobility issues can be headed off with a move to a single story home with wide doorways.
- Not having to spend their retirement cleaning and maintaining family-sized homes and yards.
Reverse Mortgages and Downsizing
Baby Boomers wishing to downsize have a couple of options — they can sell their homes, move and use the proceeds of the sale to purchase a home outright, or they can take out a reverse mortgage for purchase. This is a not-widely known use for a reverse mortgage — here’s how it works.
- The homeowner sells the old home, banking the proceeds.
- Next, he or she buys a new home, making a substantial down payment (perhaps 50 percent), and financing the rest of the purchase with a reverse mortgage.
- No mortgage payments are required as long as the homeowner lives in the residence, keeping it maintained and paying property taxes and homeowners insurance.
Why Purchase with a Reverse Mortgage?
Why would anyone take out a mortgage instead of paying cash for the new home? Here are a couple of examples.
- Suppose a couple sells their old residence for $400,000 and nets $200,000 from the sale. They want to buy a condo for $200,000. If they pay all cash, after the purchase, they’ll have nothing left. Unless they have substantial other sources of cash, that’s a risk many are not comfortable with. By taking out a reverse mortgage for purchase, they can keep $100,000 in the bank and buy a $200,000 home with no mortgage payments.
- If this same couple wants to upgrade to an ocean view condo for $400,000 and can’t qualify for a traditional mortgage, a reverse mortgage for purchase could make this golden dream real. With $200,000 down, they get a $400,000 condo and make no mortgage payments. The actual amount they can borrow depends, like all reverse mortgages, on the age of the youngest spouse and the reverse mortgage interest rate.
Reverse Mortgages and NOT Downsizing
Finally, for Baby Boomers who wish to age in place, a “regular” reverse mortgage can help them do just that by supplementing their income. If they need help around the house or want to travel to visit family or escape harsh weather, the extra money can make it happen. In that case, a reverse mortgage can allow Baby Boomers to stay in the homes they love, but more comfortably.
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