A new home can be an expensive purchase, especially for retirees with limited liquid resources to fund this type of transaction. While most buyers generally have two options when it comes to buying a new home, a reverse mortgage can provide a critical third option for retirees, according to a recent article from Seeking Alpha.
Buyers, if they have the liquid resources necessary, can pay cash for a new home. They can also go the traditional route and get a mortgage for their new home. But retirees age 62 and older have a unique home buying method also available to them: the Home Equity Conversion Mortgage for Purchase (H4P).
“Taking out a 30-year mortgage entails paying interest for the privilege of leveraging other people’s money,” states the article contributed to Seeking Alpha by Dirk Cotton, a fee-only financial planner who has covered reverse mortgages and personal finance topics on his blog, The Retirement Cafe. “The mandatory monthly mortgage payment also imposes a significant cash flow restraint during the lifetime of the mortgage since it is typically paid from income.”
The Seeking Alpha article, which Cotton notes is a guest post from HECM originator Jim Dean, explores differing scenarios to depict what would happen if a 62-year-old retiree chose to purchase a new home using a 30-year mortgage versus a HECM for Purchase.
“The HECM requires a larger downpayment than a regular mortgage, but the reverse mortgage does not require any payment of principal and interest while the home is the primary residence of at least one borrower,” the article states. “The larger down payment does result in more foregone earnings than a regular mortgage would, but less than an all-cash purchase would entail.”
Read more at Seeking Alpha.
Written by Jason Oliva