If you’re at least 62, the reverse mortgage for purchase enables you to finance a home purchase with no mortgage payment. Sound crazy? Read on and I’ll explain! This is a fantastic program and not many people even know it exists.
Before we dig into how a reverse mortgage for purchase works, let’s first cover some basics. The reverse mortgage is a highly misunderstood mortgage program.
How does a reverse mortgage work?
The most common reverse mortgage in the United States today is the home equity conversion mortgage or HECM. The HECM is an FHA-insured mortgage program that enables seniors 62 or older to convert home equity into cash.
You remain the owner of the home and you’re free to leave it to your heirs. Your heirs will inherit any equity remaining in the home.
The HECM is a non-recourse loan; the most that will have to be repaid is the value of the home, even if it’s not worth enough to settle the entire balance.
How does a reverse mortgage for purchase work?
The reverse mortgage is more commonly known as a way to tap into the equity of a home you already own. Fewer people realize that you can use a reverse mortgage to purchase a home.
So how does the reverse mortgage for purchase work? Well, it’s pretty simple: the bank finances a percentage of the purchase price and you bring in the rest (plus closing costs) as your down payment.
How much the bank finances depends on a few factors, including age of the youngest borrower (or non-borrowing spouse), purchase price, current rates, and the program you select (variable-rate HECM or fixed-rate HECM).
Order borrowers tend to qualify for more than younger borrowers, which means they can bring in smaller down payments than younger borrowers.
The HECM tends to offer more money when interest rates are low as well. Rates have been at historic lows for a while, so this is a great time to purchase a home with a HECM.
Most borrowers can expect to need a down payment of around 45% to 55% of the purchase price.
A great home purchase program
Buying a home with a HECM reverse mortgage can be a great option for two big reasons:
- Keep more cash in the bank. Normally, you have to purchase a home outright with cash to avoid a mortgage payment. The reverse mortgage enables you to finance part of the purchase with no mortgage payment. This keeps more money in the bank where it can protect and preserve your retirement lifestyle and financial security.
- Increase your purchasing power. Again, if you want to avoid a mortgage payment you have to buy with cash. If you only have $200,000 to work with, for example, that means you can only buy a home priced at $200,000 or less. But what if the bank could finance about half of the purchase price with no mortgage payment? That means you could theoretically buy a $400,000 home with your $200,000 cash. The reverse mortgage increases your buying power.
If you’re a senior and planning to purchase a home, you may want to check out the HECM for purchase. You can buy a beautiful new home while keeping more money in the bank to protect and preserve your retirement lifestyle.
If you’d like to estimate your down payment for a reverse mortgage for purchase, check out our reverse mortgage purchase calculator.