A new type of reverse mortgage was introduced at the end of last year as part of the Housing and Economic Recovery Act stimulus package. The product - called a Home Equity Conversion Mortgage (HECM) - expands the role of the traditional reverse mortgage and lets seniors now use one to purchase a home. With the largest percentage of the American population in history now entering retirement years while facing unprecedented economic challenges, the HECM is poised to propel reverse mortgages into the real estate limelight.
Many seniors have already begun to use HECM mortgages to buy a house or condo and then downsize out of their larger and less manageable homes. Those who switched out of homes with high levels of equity often realize a handsome cash profit, too, so that they walk away from the HECM purchase with a nest egg of readily available cash.
With a typical reverse mortgage, the role of lender and homeowner is reversed. The lender makes payments to the homeowner in exchange for a stake in the equity of the home. If the homeowner moves or sells, the reverse mortgage contract ends. But with the HECM version, the senior can move to a new home and buy it with the reverse mortgage, which makes this new product much more versatile and adaptable to today's active senior demographic.
The HECM program is administered by the Federal Housing Administration (FHA) and those who qualify for it begin by making a larger than normal down payment. Make a 50 percent down payment on a $200,000 home at age 62, for example, and it becomes yours for life - for only $100,000. But a much older homeowner might only have to make a nominal down payment to enter into the same kind of arrangement. The older the homeowner is, the lower the interest rate on the HECM is, too - so it may be an irresistibly affordable option for older people who want to move into a new home.
A homeowner with a house that holds lots of equity, for example, can sell their home, use the proceeds as the down payment on their new HECM-purchased home, and pocket any extra money they make. They get a new house with no out of pocket expenses, instant access to cash that was tied up in their old home, and they never have to make a single mortgage payment again, for life.
The homeowner will never owe more that the actual value of their home, and if there is a loss of value the mortgage company suffers the loss, not the homeowner or the homeowner's heirs. But if the value appreciates the homeowner or heir will be entitled to profits left after the loan is settled. Buyers need to be at least 62 years of age, and the property being purchased must be owner-occupied and used as their principal residence. The FHA administered HECM program finances homes worth up to $625,500.
For more information about FHA HECM reverse mortgages, contact the FHA or visit their Web site for details.
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