Reverse Mortgage vs. Reverse Mortgage for Purchase: What’s the Difference?
By: Courtney Jorstad
January 31, 2023 • 4 minute read
Are you looking to tap into your home equity in your retirement?
There are several options homeowners have available such as a home equity line of credit (HELOC), a home equity loan, cash-out refinancing, and even selling the home.
But there are two unique financial products that are only available to homeowners who are 62 and older, and that is a reverse mortgage and a reverse mortgage for purchase.
In this article, we will compare the similarities and differences and discuss which one is right for qualifying homeowners based on their needs and their goals.
Reverse Mortgage: What it is and How it Works
The most common type of reverse mortgage that borrowers typically obtain is the Home Equity Conversion Mortgage (HECM), which is backed by the Federal Housing Administration (FHA).
A HECM reverse mortgage converts part of the home’s equity into cash that borrowers can opt to receive as a lump sum, a line or credit, monthly payments, or a combination of the three.
The amount you receive from a reverse mortgage depends on several factors including the age of the youngest borrower, the market value of the home, and the current interest rate. The typical amount most borrowers qualify for ranges from 50% to 70% of the value of the home.
The reverse mortgage also pays off the current mortgage, if there is one, which means it also eliminates any monthly mortgage payments.
In order to qualify for a reverse mortgage, borrowers must meet several specific requirements, including the following:
- At least one of the homeowners must be at least 62 years of age or older
- The home must be the primary residence of the homeowners
- The home typically needs a minimum of 50% equity
- The home needs to be a single-family home, a multi-family home (in which the homeowners occupy one of the units), a townhouse, a qualifying condominium, or another qualifying property
- The home needs to be maintained
- The property taxes need to be up to date
- In order to apply for a reverse mortgage, homeowners must complete a counseling session with a counselor approved by the U.S. Department of Housing and Urban Development (HUD)
After homeowners obtain a reverse mortgage, they continue to own the home. This also means that they are still required to pay property taxes, homeowner’s insurance, pay any homeowners association (HOA) fees, and maintain the home.
A reverse mortgage loan is not paid back through monthly payments like a traditional mortgage. It comes due when the homeowner decides to sell the home, the homeowner passes away and the home is subsequently sold, or it is no longer the primary residence of the homeowner.
Since a HECM reverse mortgage is backed by the federal government, this means that it comes with several protections. For example, when applying for a reverse mortgage, borrowers have the right to cancel at any time during the application process, even three days after the closing documents are signed.
Another important protection ensures that borrowers will never owe more on the home than what it is worth.
Why Choose a Reverse Mortgage
A reverse mortgage is a good option for those who want to retire in place but find themselves in need of additional funds to round out their retirement portfolio.
The funds from a reverse mortgage can be used however you would like. Some common purposes include:
- Supplementing income
- Pay off credit card debt
- Cover unexpected expenses
- Make home renovations or repairs
- A rainy-day fund
Reverse Mortgage for Purchase: What it is and How it Works
A reverse mortgage for purchase, also known as a HECM for purchase, allows homeowners the ability to secure a reverse mortgage and purchase a new home at the same time.
Borrowers interested in a reverse mortgage for purchase must meet the same qualifications as a traditional HECM reverse mortgage. The difference is that the funds from the reverse mortgage are used to pay the balance of the purchase after the down payment is accounted for.
If there are leftover funds, those will go to the homeowners to use however they see fit.
The advantage to a HECM for purchase over selling the home and obtaining a traditional mortgage is that it doesn’t require monthly mortgage payments.
Homeowners are still required to pay property taxes, insurance, and maintain the home.
Why Choose a Reverse Mortgage
A reverse mortgage for purchase may be a good option for those who would benefit from a reverse mortgage, but they would like to relocate.
This allows borrowers to move closer to family or downgrade their home to one that is more fitting to their current lifestyle.
Reverse Mortgage vs. Reverse Mortgage for Purchase: Which One is Right for You?
The choice between a reverse mortgage and a HECM for purchase comes down to whether you want to retire in place or relocate.
If you want to stay in your home, then a reverse mortgage is the way to go. If you are interested in the benefits of a reverse mortgage, but want to purchase a new home, then a reverse mortgage for purchase may be the right choice for you.
Most reverse mortgage lenders also offer a HECM for purchase option. If you are ready to move forward with your decision, please check out our list of recommended reverse mortgage lenders.