New Use for Reverse Mortgages

Congress snuck a new use of reverse mortgages into the Housing and Economic Recovery Act of 2008.

Reverse mortgages traditionally are for people who already own homes and want to tap their equity. The new provision, known as HECM for Purchase, lets you use an insured reverse mortgage to buy a home.

Here is how it works. A buyer at least age 62 puts down a substantial down payment for the purchase of a new home or condo. The rest of the purchase price is funded by an FHA-insured reverse mortgage.

As with a traditional reverse mortgage, the amount of the loan depends on the buyer’s age and current interest rates. A buyer between 62 and 65 today can borrow about 52% of the price. On a $300,000 property, all the buyer needs is a $144,000 payment plus closing costs. The rest of the purchase price is financed with the reverse mortgage. The owner pays property taxes, insurance, maintenance, and any homeowner fees or other costs.

The new program makes it easier to downsize in retirement. A standard retirement scenario is to sell a large home and use the proceeds both to buy a smaller home and fund retirement. With the new program, only about half the cash is needed to buy the new home than was needed in the past.

RW August 2009