In the fourth of a five-part reverse mortgage series, Jack Guttentag, a.k.a. The Mortgage Professor, writes for Inman News on important topics on the loans and the people who take them out, including home buyers.
Because many elderly homeowners want to remain homeowners but not necessarily in their current house, a reverse mortgage could be a viable solution, Guttentag writes.
This can happen in three different ways, he explains:
There are three ways to acquire a new house while taking out a Home Equity Conversion Mortgage (HECM), which is a reverse mortgage.
One way is to pay all cash for the house, then reverse mortgage it.
The second way is to buy the new house with a forward mortgage small enough that it can be paid off with the proceeds of the HECM.
The third way is to purchase the house and take out the HECM in one transaction under the “HECM for Purchase” program authorized in 2008.
Seniors using the HECM for Purchase program can select either the standard or Saver version, and either an adjustable-rate or a fixed-rate version — four choices in all. The Saver version offers a lower upfront charge in exchange for a smaller draw, and should appeal only to purchasers who don’t intend to remain in the home very long. Most purchasers will and should opt for the standard HECM.
….In the current market, fixed-rate and adjustable-rate HECMs have about the same maximum draw. If I were taking the maximum draw, I would select the fixed-rate HECM because when interest rates begin accelerating, my loan balance would continue to grow at the fixed rate. If my house appreciated significantly, I could refinance and draw more cash sometime down the road.
However, if I wanted to use less than half of the maximum draw to purchase the house, retaining the rest as an unused credit line, the adjustable-rate HECM might work out better in a rising-interest-rate environment. While the amount I borrowed would grow at the rising rate, my unused credit line — the amount I could have borrowed, but didn’t — would also grow at that rate, expanding my future borrowing power.
Written by Elizabeth Ecker