As they get older, most seniors take out a reverse mortgage to help them stay in their current home.
A reverse mortgage is a loan for seniors age 62 or older, which allows them to convert their home equity into cash with no monthly mortgage payments. Reverse mortgage loans are commonly used to cover home renovations, medical costs, and daily living expenses.
But you can also use them to finance a new home. Kiplinger explains how:
The Home Equity Conversion Mortgage (HECM) for Purchase was created by Congress four years ago to streamline home-buying transactions and cut costs, says Peter Bell, president of the National Reverse Mortgage Lenders Association. 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.
But the loan has had a slow take-up rate, Bell says. “It’s a concept people don’t fully understand,” he says.
As with a traditional HECM, a homeowner must be 62 or older to qualify for the federally insured HECM for Purchase. You don’t make payments while you live in the house, but the loan and interest come due when you sell, move out for 12 months or more, or die.
Borrowers generally get a fixed-rate, lump sum loan, which goes toward the house purchase. The balance starts accruing interest immediately. You can leave some reverse mortgage proceeds in a line of credit for future use by taking an adjustable-rate loan, and you will pay interest only on the proceeds you use.
Unlike a conventional HECM, the HECM for Purchase requires a down payment. When you take out a conventional reverse mortgage, the loan proceeds are based on the equity in your home.
To learn more about reverse mortgages, click here.