One option in the broader category of using reverse mortgages for debt coordination for housing is the HECM for Purchase program, which was started in 2009 as a way to use a reverse mortgage to purchase a new home. The government saw enough people using a more costly and complicated two-step process—first obtaining a traditional mortgage to purchase the home and then using a reverse mortgage to pay off that mortgage—and sought to simplify the process and costs.
With an example of a 62-year-old, a 5% expected rate, and a principal limit factor of 52.4%, the HECM for Purchase could cover this portion of the home’s cost. The other 47.6% would need to be financed from other assets, such as selling the previous primary residence.
The remaining payment cannot be made using other debt. To keep the initial mortgage insurance premium down, the borrower would only want to tap 60% of the principal limit—31.4% of the home’s value—and finance the other 68.6% through other resources. Those resources could be paid back after one year has passed, so the 47.6% number would effectively still apply then.
After that point, the new home is owned with a debt that does not need to be repaid until the borrower leaves the home. In terms of coordinating the use of debt for housing, not having to make a monthly mortgage payment reduces the household’s fixed costs and provides potential relief for the need to spend down investments.
Should the borrower live in the home long enough, the loan balance will likely grow to exceed the value of the home (more on this later). At that point, the heirs could hand over the keys and be done with the matter. In this type of situation, one could interpret the HECM for Purchase program as a way to provide housing services as long as the borrower stays in the home for an upfront cost of 47.6% of the home’s value.
Should the borrower leave the home while the loan balance is still less than the home value, the home could be sold with any remaining equity still available to the borrower after the loan is repaid.
The HECM for Purchase program could be used to either downsize or upsize a retirement home. For those downsizing, the HECM for Purchase would free up more assets from the sale of the previous home to be invested for future use. For those upsizing who have the financial resources to manage this sustainably, the HECM for Purchase could allow for a more expensive home—especially considering that obtaining a traditional mortgage may become increasingly difficult after retirement.
Suppose the retiree wants to move from a $300,000 home to a $600,000 home. If the PLF is over 50%, the proceeds from selling the previous home and the $300,000 credit available with the HECM for Purchase would cover the full price of the new home. Of course, the borrower may want to avoid the 2.5% initial mortgage insurance premium, but this is the basic process for upsizing without otherwise tapping into investments or taking out a new traditional mortgage.
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