While tapping home equity through a reverse mortgage is one way to use the loan, another, less common use of reverse mortgages involves purchasing a new home, suggests consumer financial services company Bankrate.
The home equity conversion mortgage (HECM) for Purchase program, introduced by the Federal Housing Administration (FHA) in 2009, has been little used, but should be considered when older Americans are looking to buy a new home.
The reverse mortgage can cover 47% to 52% of the home’s purchase price, but the buyer has to come up with the rest from retirement accounts, gift money or savings.
It allows older Americans to buy a house that better suits their needs without dumping all their retirement assets into it, which would be the case in an all-cash transaction, Bankrate writes. It also lets them avoid dipping into their monthly fixed income, which would occur if they took out a traditional mortgage.
“This is not just a mortgage product. It’s a financial, cash-flow tool for retirees,” says Rob Cooper, national director of strategic partners for Reverse Mortgage Funding. “It gives them more purchasing power if they don’t want to drain all their assets. It also gives them the luxury to get a better lot, to add all the upgrades they want and to still have no mortgage payment.”
Though introduced five years ago, the reverse mortgage product is still “new” and has not gained much steam among consumers. From October 2013 through June 2014, more than 40,500 reverse mortgages were originated, but only 3.3% of those were used to buy another home.
“It’s new and just catching on,” says Peter Bell, president and CEO of the National Reverse Mortgage Lenders Association (NRMLA). “I recommend to all seniors that if they are age-eligible and considering purchasing a home, they should at least look at the option.”
Read the full Bankrate article here.
Written by Emily Study
