Seniors Buying a New Home: Traditional vs Reverse Mortgages

As a senior looking to purchase a new home, it’s likely that you’ll have to rely on some sort of loan to help you with the cost. If you have enough cash - either liquid or from the potential sale of your existing home - it may be smart to simply buy the new house outright to avoid taking on new debt after retirement. But for many seniors, this just isn’t an option. Here are some advantages and disadvantages of the most common types of mortgages available for seniors.
 

Traditional Mortgage

If you’ve ever purchased a home before, there’s a good chance you’re familiar with the structure of a traditional mortgage. But as you’ve aged and perhaps retired, securing a traditional mortgage may not be as easy as it once was. Lenders typically look for steady monthly income when approving 15, 20, or 30-year mortgages, and many seniors are living on a fixed income and do not have a monthly salary to hold up as proof they can pay their monthly mortgage payments. Of course, if you have other steady sources of income in the form of social security, pension payments, legal settlements, investments, or some other source, you may still be offered a traditional mortgage, but it’s a little bit trickier.

The obvious advantages of a traditional mortgage is that it costs you less money up front, apart from the down payment and closing fees. If you don’t have a lot of cash on hand, spreading your loan payments out over the course of many years is clearly an attractive option.

A problem with this, however, is the fact that seniors’ income typically decreases - not increases - over time. From age 20 to retirement, income increases. After retirement, it usually falls off. Let’s say you choose to buy a new home with a traditional 30-year mortgage. Let’s say you’re 63 years old. That means you’ll be making payments (that may grow larger over time) until you're 93. If you have concerns about maintaining enough income to pay a monthly mortgage for many, many years, a traditional mortgage may not be the best option.
 

Reverse mortgage

Using a reverse mortgage to purchase a home is a relatively new concept. Like using a reverse mortgage to draw money from your current home equity, using a reverse mortgage to purchase a new home means the bank will pay you based on the value of the home. The clear advantage of buying a home this way is that you will not have to make a monthly mortgage payment. Payment on the home will only be due when you die or move.

The problem with using a reverse mortgage to buy a home is that it requires a lot of money up front.

“In fact, you can't buy a home with a reverse mortgage unless you have enough money to make a substantial down payment, usually about 50 percent of the purchase price. If you get a Home Equity Conversion Mortgage, which is backed by the Federal Housing Administration, the maximum home value you can borrow against is $625,000,” says US News & World Report.

Reverse mortgages are good for seniors that have enough money in savings to make a substantial down payment, but don’t have a steady monthly income or fear they won’t in the near future. If you can pay the large initial lump sum with the proceeds from selling your current home, that can also be an option.

Don’t forget about the other costs!

You mortgage and down payment aren’t the only costs you need to worry about, of course. Whether you choose a traditional or reverse mortgage to help you purchase a new home, you need to account for closing costs, homeowner’s insurance, hiring moving help, storage (if necessary), and regular home maintenance.

Photo Credit: Pixabay.com