New regulation recently passed this year allows Reverse Mortgages (HECMs) to be used for the purchase of a home. The requirements to obtain an HECM are that one of the homeowners needs to be over 62 years old, and the owners must have substantial equity in the home (the HECM only lends up to 50% of the appraised value of the home).
What is HECM for Purchase?
HECM for Purchase allows seniors, age 62 or older, to purchase a new principal residence using loan proceeds from the reverse mortgage.
What is the purpose of the program?
The program was designed to allow seniors to purchase a new principal residence and obtain a reverse mortgage within a single transaction by eliminating the need for a second closing. The program was also designed to enable senior homeowners to relocate to other geographical areas to be closer to family members or downsize to homes that meet their physical needs, i.e., handrails, one level properties, ramps, wider doorways, etc.
Why is this interesting?
Suppose you and your wife are retired, live in Ohio, have owned your home for 22 years (which is now worth $700,000 and you owe only $150,000), and want to retire to Charleston, SC to enjoy golf, sun and beaches and forget about snow...
Before this change, if you did not have the cash to buy a second home, your only options would be a) to sell your current home in a buyer's market!; b) To re-finance your existing home (but your payments may go up, and you must have two closings); or c) to qualify for a second home loan (tough on a fixed retirement income).
Now there is an easy, alternative option: To take on a reverse mortgage on your home in OH (in this case up to $350K, minus $150K owing = $200K in cash to buy the new home), have no monthly payments, and own two primary homes. The tax law allows each spouse to own a primary home (there are restrictions of time spent in each - talk to your accountant!), so when you sell, you will still have the capital gains free exemption. Your heirs are diversifying markets (same asset class). And you have NO MORE MORTGAGE PAYMENTS ON EITHER HOME (so you have excess cash to play!). Sounds like a good plan!!
Jerry Garner, a client of mine, is an expert in reverse mortgages. If you are curious to know more, contact me - I'd be glad to connect you with Jerry.