Can I Use a Reverse Mortgage to Buy a Second Home?
Can you use a reverse mortgage to buy a second home? Well, sure. Should you? That’s another question.
Though reverse mortgages can provide funds for seniors, they should be used wisely, with awareness of the costs and risks. We recommend asking yourself a few questions to figure out your best option before taking the plunge. But first, a simple question, and perhaps the most important one of all. Before we dive in, though, here's a quick primer on owning a second home, for the uninitiated newcomers out there. Got the info you need now? Let's get started, then!
What is a reverse mortgage?
A reverse mortgage (also known as a home equity conversion mortgage, or a HECM) is a financing option often utilized by older borrowers of retirement age and is usually thought of as a "last resort" for financing during the final stage of life.
It essentially involves reversing the traditional flow of money between a lender and a borrower. Instead of sending out a check every month, the borrower receives regular payments from their lender based on the amount of accumulated equity they own through their home.
This loan will eventually be repaid when the borrower dies, or when they move out of and sell the property in question.
How can you use it on a second home?
You can use the funds you accumulate through a reverse mortgage on pretty much whatever you would like to, including a second home.
Federal mandates require that the property you're mortgaging through the reverse mortgage program continue to be your primary residence. But that doesn't mean you're homebound in this location for the duration of this agreement.
As long as you spend at least six months in place, then you'll be fine. And of course, it goes without saying that this is only a good option if you're in a financially secure position.
How likely are you to need to tap into your home equity in the future?
Unless you are able to pay it in full, a reverse mortgage will prevent you from using your home equity for anything else, even if you gain more equity because the value of your home skyrockets. Unlikely in most locations, but we can dream, right?
Though the original intention of reverse mortgages was to allow seniors to meet expenses without moving out of their homes, some lenders are selling these loans as a means to afford a more lavish lifestyle in retirement.
Are you willing to move into your second home if that becomes the best option?
Let’s say you find yourself at a crossroads, and you have to choose between paying the mortgage on your second home and the taxes and insurance on your primary residence.
If you have a reverse mortgage on the primary residence, you are still responsible for those things, because you’re still the owner. If you can’t pay those costs, your lender may have the right to foreclose on that property, to recoup the principal and accrued interest on your loan, and you will be left with only your second home.
On the upside, you won’t be homeless. In that sense, and if you’re sure you want a reverse mortgage, using it to pay for a second home may make more sense than spending the proceeds on other living expenses.
Do you have other options?
The interest rates on reverse mortgages are likely to be higher than those on home equity lines of credit or even another primary mortgage to pay for a second home.
Discuss your options with a lender and see what other loans you might qualify for. Talk to a trusted financial advisor to learn more about making your money last.
Who else lives in your primary residence with you?
If you die or have to move out for more than 12 months (like to an assisted living facility), unless their name is also on the reverse mortgage, they will likely have to leave the house, because the loan will be due.
Make sure the people who live with you are protected before considering a reverse mortgage.
Is your desire for a second home overshadowing your instinct to make a wise decision?
Reverse mortgages can seem like easy money, and everyone wants a beach house, an apartment in the city, or a cabin in the woods. But there are risks involved and you should be aware of them.
Every homeowner should explore all the options available to them, and a reverse mortgage is one of those options. Just make sure you understand all the ins and outs, the costs and risks, before you leap!