Use a reverse mortgage to buy a second home at the Lake of the Ozarks

While a reverse mortgage is usually used to help seniors have housing options in their later years, it’s rarely thought of as a way to maximize returns on a second home purchase.

Here’s a hypothetical scenario using Mr. and Mrs. Jones, who thanks to a wise purchase and many mortgage payments own a home valued at $425,000 free and clear.

Using a HUD Home Equity Conversion Mortgage (HECM) (that can be used by homeowners who are 62 years of age and older) the Jones could net up to $120,000 using the formula that is a mix of interest rate, the borrowers age, and equity in the home.  For example, on the basis of a loan at recent interest rates, a 65-year-old could borrow up to 26 percent of the home’s value, a 75-year-old could borrow up to 39 percent, and an 85-year-old could borrow up to 56 percent.  The rest of the balance needed can be obtained from other sources, such as a retirement fund or cash. 

The borrower remains the owner of the home and may sell it and move at any time, keeping the sales proceeds that exceed the mortgage balance. A borrower cannot be forced to sell the home to pay off the mortgage, even if the mortgage balance grows to exceed the value of the property. A HECM loan need not be repaid until the borrower moves, sells, or dies. When the loan must be paid, if it exceeds the value of the property, the borrower (or the heirs) will owe no more than the value of the property. FHA insurance will cover any balance due the lender.

So the Jones’ take their $120,000 and add another $30,000 from a retirement account to buy a condominium at the Lake of the Ozarks.  They now own that condo free and clear, as the reverse mortgage is attached to their primary home.  The Jones will have no mortgage payment on either property, and have the option of living where they want, when they want to, with no real concerns of having to spend more time at one property over the other, or worrying about which one is the primary residence for tax reasons. 

So why not just sell the primary home and take the tax exclusion, then buy at the Lake of the Ozarks for cash?  That is an option, but the reverse mortgage eliminates any new monthly mortgage payment, and helps them to keep more of the sales proceeds from their primary home and that translated as a larger amount of savings.  If the home appreciates in value, that money is yours to keep. 

If you have any questions about financing your second home purchase at the Lake of the Ozarks, please feel free to call John Garrett at RE/MAX Lake of the Ozarks, the Lake Select Group, 573-302-2320. 

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