In the past a reverse mortgage was a way for seniors to access the equity they had built up in their primary residence. The concept is simple; a homeowner receives a check (in lump sum or multiple payments) from the bank against the existing equity in his/her home and the homeowner's obligation to repay the loan is deferred until the owner dies or the home is sold.
The new version of the HECM program allows buyers to use a reverse mortgage as a plan to permanently finance the qualified buyers new home. Through the program, the qualified homeowner may live "mortgage free" and only be responsible for property taxes, insurance and maintenance costs for as long as they live in the home. Beyond living mortgage free, additional financial benefits may be found by freeing a retired homeowner's equity:
Here are few of the fine points:
The purchase program, in effect, doubles the purchasing power of eligible buyers, several brokers said. Under the program, a couple with a $1,800 monthly payment on a home in which they have $250,000 in equity could sell the house, use $150,000 of their equity to buy a $300,000 condo and never make another mortgage payment.
- Buyers need to be at least 62 years old. The older the borrower, the greater the amount of the home price that can be financed.
- The property being purchased must be a principal residence and owner-occupied.
- Homes can appraise at up to $625,500.
- Buyers need to put up a substantial down payment (often 40% or more) to create the instant "equity". The size of the down payment varies depending on the age of the buyer and the interest rate of the loan.
- Reverse mortgage costs and fees can be substantially higher than for conventional loans.
- Buyers must pay 2 percent of the property's appraised value - up to the maximum value of $625,500 - as a premium for federal mortgage insurance.