Buying a Home?
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Using a Reverse Mortgage Loan to BUY a home

The changed economy has taken its toll not only on our retirement nest eggs, but also on our dreams for retirement.  While dreams of that second retirement home at the beach may have been put on hold, downsizing to a smaller home is not out of the question for young retirees.

In January 2009,  the government made available for home purchase the exact same program used to draw equity from an existing home – the Reverse Mortgage.  The new program is often called “HECM For Purchase”.

How does it work?  The amount of money available to the homeowner for home purchase is based upon the same rules as available to homeowners for traditional equity redemption. So for example, a 65-year-old couple who wants to downsize from MegaMansion to CozyCottage valued at $625k would be eligible for nearly $338k  “principal limit” (based upon maximum loan values in January 2014).   That means that rather than talking all the proceeds from the sale of MegaMansion, the homeowners can limit their cash outlay for the new home purchase using the available Reverse Mortgage monies.

What was that again? How exactly does that work?  Lets look at an example.   Bob and Eileen sold their 4 bedroom 3 bath home (the kids are long gone!)  for $1.5M and planned to move to a new cottage with all the amenities – an open floor plan, large bathrooms (employing universal design elements), private patio, extra storage and garage.  While they cleared more than $900k in cash after paying off their existing mortgage, they would prefer to retain some of that cash for their personal use.

The wonderful new cottage is priced at $625k.   Using a Reverse Mortgage to finance part of the purchase price, Bob and Eileen can qualify for $338k , before fees and closing costs (title insurance, county transfer taxes, etc). Let's hypothesize that total closing costs are $27k.   That means that Bob and Eileen need use only $314k from the home sale proceeds and can retain th rest for enjoyment in their retirement. They have no mortgage payments (although they must comply with loan terms such as paying property taxes, hazard insurance).  The quality of their life is improved by moving to a new home (with less work) and already outfitted with the amenities that will allow them to successfully age in place.

Is a Reverse Mortgage right for you?

Every family situation is different.  Consider the following:

What are you trying to accomplish?  

What current mortgages need to repaid?  

What “cash advance” is needed at funding?  

What is your present income?  

What are current and future cash flow needs?