More Buying Power for Seniors With a Reverse Mortgage

Housing prices have been in flux over the course of the last few years.  For those looking to purchase a home, the combination of higher interest rates and inflation have decreased purchasing power.  Of particular note to seniors is the rising inflation, which can hurt current and future cash flows when on a fixed income.  For those over 55 years of age looking to purchase a new home, a reverse mortgage can offer some help.  

For the majority of home buyers, there are two options to purchase a new home: (1) all cash or (2) a conventional ‘forward’ mortgage.  However, for home buyers 62 years of age or older, a third option is available: the Home Equity Conversion Mortgage (HECM) for Purchase (H4P) loan.

A Home Equity Conversion Mortgage is the most common type of reverse mortgage.  This is a government insured mortgage that leverages the equity in a home and allows the borrower to receive payments from the lender.  These payments are offered in a variety of options like a lump sum, fixed payments over time, a line of credit, or a combination of those three.  

In order to qualify for a HECM, borrowers must be 62 years of age, have a significant amount of equity in the home (or own the home outright), live in the home as their primary residence, and remain up to date on property taxes and homeowners insurance.  

The H4P loan is specifically for those looking to purchase a home and get a reverse mortgage.  It combines two transactions (home purchase + reverse mortgage) into one.  It also allows seniors to potentially increase their purchasing power.  Let’s discuss this in detail via a fictitious example.  

Pretend that I qualify for a HECM and am planning to sell my current house and purchase a new home.  In this scenario, I’d like to move closer to my kids and grandkids and also find a home that is a bit smaller to better suit my needs in retirement.  I estimate that I’ll net $400,000 from the sale of my current home.  I’d like to purchase a home that is $500,000.  To complete this purchase, I have a few options.

1. Pay all cash.  I could do this by dipping into my retirement savings to take out $100,000.  The pros for this option are that I own the house and don’t have a mortgage payment.  The biggest con is that I’ve reduced my retirement account by $100,000.  
2. Get a conventional ‘forward’ mortgage.  This would allow me to preserve the entirety of my retirement account and also likely create a scenario where I could make a sizable down payment.  However, I would also have a recurring expense for a very long time in the form of a monthly mortgage payment.  This may not be ideal at this phase of my life.
3. The Home Equity Conversion Mortgage for Purchase loan.  I could take the majority (or all) of my proceeds from the sale of my current home to apply towards a H4P loan.  This would create enough equity to qualify, keep the entirety of my retirement account, and create a scenario where I could either receive payments from the bank or open a line of credit for future needs.  

It’s important to note that a HECM is a non-recourse loan.  This means that the balance of the loan cannot exceed the value of the home at the time of sale.  This is an important protection for reverse mortgage borrowers that is particularly helpful if the value of the home decreases over time.  Given the changes seen in the housing market over the past few years, this is very valuable for those with a reverse mortgage.

If you are considering a H4P loan or a HECM and would like to learn more, please give the team at Equity Access Group a call.  They can help answer any questions you may have so that you can determine if a reverse mortgage is right for you.