Forbes: Benefits of Using Reverse Mortgages for Home Purchases

Reverse mortgages have many different uses that can accommodate a variety of personal needs, but one particular usage is often overlooked by the general public, and that is using a reverse mortgage to purchase a new home.

In a recent Forbes article, Wade Pfau, professor of retirement income at The American College and frequent reverse mortgage commentator, discusses the practical use of a Home Equity Conversion Mortgage for Purchase and its implications for retirement planning.

At the most basic level, the major benefit of a HECM for Purchase is that it allows homeowners age 62 and older the ability to obtain a reverse mortgage and buy a new home all within a single transaction. But there are also other benefits to this unique product that might not seem so obvious.

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“In terms of coordinating the use of debt for housing, not having to make a monthly mortgage payment reduces the household’s fixed costs and provides potential relief for the need to spend down investments,” Pfau writes.

The HECM for Purchase could also allow retirees the opportunity to downsize, or even upsize, into a new residence during retirement.

For the downsizers, Pfau notes the H4P could also free up more assets from the sale of the previous home, which could then be invested for future use.

While for those upsizing, and who have the financial resources to manage this sustainably, Pfau notes the H4P could allow for a more expensive home, especially when considering that potential difficulty of obtaining a traditional mortgage after retirement.

“Of course, the borrower may want to avoid the 2.5% initial mortgage insurance premium, but this is the basic process for upsizing without otherwise tapping into investments or taking out a new traditional mortgage,” he writes.

Read more at Forbes.

Written by Jason Oliva

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  • It is important to note what Jason writes and what Dr. Pfau writes. Jason says: “For the downsizers, Pfau notes the H4P could also free up more assets from the sale of the previous home….” Yet Dr. Pfau writes: “For those downsizing, the HECM for Purchase would free up more assets from the sale of the previous home….” Jason says there is a possibility that downsizing would free up more assets by simply using the word “could” instead of “would.” Dr. Pfau uses the word “would” without any caveat. There are times when the purchaser lacks any assets to close the purchase and even with the H4P it is a squeeze to close the purchase transaction even when downsizing. So Jason got it right but to do that he had to use another word than Dr. Pfau does.

    Please note the quotations above go on to say that the left over assets can be used for investment purposes in the future. If this is not a rationale for investment acquisition through leveraging using a HECM, what is it? This is not the time in life for seniors to be risking their cash reserves in leveraging transactions especially since the majority of seniors do not get HECMs in their sixties.

    Dr. Pfau purports: “With an example of a 62-year-old, a 5% expected rate, and a principal limit factor of 52.4%, the HECM for Purchase could cover this portion of the home’s cost. The other 47.6% would need to be financed from other assets, such as selling the previous primary residence.” Yet is that true? How are the upfront costs of the HECM going to be paid? No matter how it is put, the upfront costs of a HECM limit how much of the total proceeds of the HECM can effectively go toward purchasing the home.

    Even when only 60% of the proceeds are being used to hold down upfront costs, Dr. Pfau fails to reduce the available proceeds by the upfront costs.

    Dr. Pfau advises: “Should the borrower live in the home long enough, the loan balance will likely grow to exceed the value of the home (more on this later). At that point, the heirs could hand over the keys and be done with the matter.” Why? If at least one borrower is living in the home as his/her principal residence, it does not matter if the home is underwater (meaning the current value of the home is less than the balance due). As long as all loan covenants are being met, the borrower can continue living in the home with no assessable liability beyond the collateral, even if the home is $500,000 (or more) underwater.

    Even if the borrower has passed away, what right do the heirs have to hand over the keys anyway? It is the executor or trustee who normally has this right at first unless the heirs are remainder men on a life estate (or if the borrower is living, the heirs hold a durable financial power of attorney). Dr. Pfau never addresses these conditions.

  • All of this, including what Jim came back with in his comment is fine and dandy but for our readers both the article and Jim’s comment can be a bit confusing! Jim, with all due respect to you, please, don’t take what I said the wrong way.

    What all this boils down to is that the H4P program offers seniors who are in the market to purchase a home many benefits. Regardless if it is for down sizing, upsizing or just purchasing a home outright!

    What is so great about the program is that a senior who wants to purchase a home, does not want a monthly mortgage payment and does not want to use a great deal of their assets to purchase the home, the H4P program could not fit that need any better!

    John A. Smaldone
    http://www.hanover-financial.com

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