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.
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.
Written by Jason Oliva