One kind of reverse mortgage letsyou buy a new home
If you want a smaller house when you retire, one kind of reverse mortgage might be helpful.
A Home-Equity Conversion Mortgage for Purchase (HECM) could be the answer.
If you take a HECM for Purchase, you could sell your big house, and buy another home, without worrying about mortgage payments. This can be a great tool if you want to leave your existing home for a smaller house or move closer to family.
With a regular reverse mortgage, anyone 62 or over can stay in their home and tap equity for income. An HECM for Purchase is another type of reverse mortgage that helps you buy a different house for your main residence, if you wish.
Every retirement situation is different, but an HECM for Purchase could allow you to buy either a nicer home or smaller home, for example, and still not have any mortgage payments.
To take but one example: A couple sells a home for $120,000. They want to buy a home for $255,000. In qualifying for an HECM (based, in part on their ages), they put down $95,000 on the closing on their new home. That leaves them about $24,000 left from their home sale. Their credit history is not an issue. They never have a mortgage payment. They can live in the house until they die.
One thing to consider: Need-based government programs can be affected by this type of transaction. Seniors may want to get counseling from an organization like the National Council on Aging. Social Security and Medicare are not affected by this type of mortgage.
How much you can get
Lenders will determine the maximum payout you’ll qualify for. It’s based on the price of your new home (the lesser of appraised value or purchase price) up to $625,000, and ages of you and your spouse. Generally, the older the homeowners and the lower the interest rate, the higher payout they can get.
How to save on interest
If you take the maximum payout in a lump sum, you incur a fixed interest rate ranging from 4.75 to 5.25 percent. Interest costs accrue over the life of the loan, as does the mortgage insurance cost (1.25 percent of the balance).
You could reserve part of the lump sum payout as a line of credit with a variable rate that was recently 2.5 to 3 percent.
You’ll pay the lender’s origination fee and lender closing costs, as well as an up-front mortgage insurance premium, all of which can be rolled into the loan.