Kiplinger: Downsize Through a Reverse Mortgage for Purchase

A reverse mortgage not only can help aging borrowers receive money from the equity in there homes during retirement, but can also help finance a new home, according to a report from Kiplinger. 

The Home Equity Conversion Mortgage (HECM) for Purchase was created only four years ago with the intent of streamlining home buying and cutting mortgage-related costs that come with homeownership. 

Lesser-known than its counterpart product of the standard reverse mortgage, the HECM for Purchase may serve as the answer for aging homeowners looking to downsize during retirement. 

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Kiplinger writes:

Before, seniors would buy a new home, incurring closing costs, and then take out a reverse mortgage on the new home, triggering new closing costs. The HECM for Purchase rolls this into one transaction and one set of closing costs. 

Unlike a conventional HECM, the HECM for Purchase requires a down payment. When you take out a conventional mortgage, the loan proceeds are based on the equity in your home. With the new product, you start out with no equity because you don’t own the new house yet.

For there to be equity in to cover the accrued interest, the HECM for Purchase requires that you pay about half the home’s sales price with your own cash. The reveres mortgage picks up the difference. 

To pay their half of the loan, Kiplinger writes, borrowers can draw on money from their savings, the sale of their other home, or from family members. The only restriction is that the money cannot be borrowed to cover the cost of the reverse mortgage for purchase loan. 

Read the full Kiplinger article on HECMs for Purchase here

Written by Jason Oliva

 

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  • The counterpart of HECMs for Purchase is NOT HECMs for Purchase. This kind of confusion only adds to the confused discussions we read so much of in our industry. This misconception needs immediate adjustment.

    HECMs are divided into various categories. One of them is their transactional type. Per the HECM Outlook report we have Traditional HECMs (the most frequent), Refinance HECMs (previously named HECM to HECM refis), and HECMs for Purchase.

    HECMs are also divided into categories based on their principal limit factors, Standard and Saver. Then there is the categorization by closed or open end and finally, by how frequently their interest rates change, 1) fixed, 2) monthly adjusting, and 3) annually adjusting.

    One can also categorize adjustable rates by their indexes: LIBOR and CMT. Today we are supposed to know what people mean when they say: “You know the LIBOR.” Yet do they mean LIBOR Saver or LIBOR Standard. Do they mean monthly adjusting or annually adjusting?

    But to say “lesser-known than its counterpart product of the standard reverse mortgage, the HECM for Purchase” is very strange since over 96% of all HECMs for Purchase are fixed rate Standards. From that point forward one must guess what the writer means.

  • It is hard to believe how many people try so hard to differentiate a HECM for Purchase from Traditional HECMs and HECM to HECM refis and thus fail to see its similarities.

    The down payment concept is a distraction. On any HECM, if the difference between the value of the home and the net principal limit (after all upfront costs) is less than the equity which the borrower has in the home, then the borrower must bring “equity” to the funding table, generally in the form of cash.

    For example, we had one borrower who had 15% equity in his home but the net PLF was only 65%. He had to come to closing with an “equity purchase” of 20%. If the home had been a purchase, the equity purchase would have been 35% rather than 20%. Are the two really all that different except for the amount of cash the borrower is required to bring to closing?

    So bottom line in regard to the “down payment” all HECMs work the same way. To the extent that a borrower is “equity short,” the borrower must bring sufficient cash to closing.

    Some might want to argue about lower upfront costs with HECMs for Purchase but HECM to HECM refis also generally end up with lower upfront costs. From a financial viewpoint are HECMs for Purchase really all that different than other HECMs? It always seems there is more far puff and “magic” with HECMs for Purchase than really necessary when trying to explain the financial differences of HECMs for Purchase and other HECMs. In fact the smoke and mirrors have been so persuasive that far too many within the industry now refer to it as “the Reverse Mortgage Purchase Program” and only understand it in terms of fixed rate Standards which is really sad.

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