Reverse Mortgages 101

People 62 or older can use an HECM (the Federal Hosuing Administration's reverse-mortgage program) to purchase a single-family home, a condominium or a small multifamily residence. 

The government noticed that many older people move into a smaller residence as they age and then get a reverse mortgage. To do that means that there are two sets of closing costs: the closing costs for purchasing the house with a morrtgage, and a second set of closing costs when taking out a reverse mortgage. By using a HECM to purchase a house, there is only one set of closing costs.

To use this alternative, you must have cash on hand to pay the difference between the amount of the HECM proceeds and an amount equal to the sale price of the house plus closing costs. In a very real sense, your down payment becomes the equity which justifies the reverse mortgage loan.

Instead of making payments, you collect monthly payments from the equity on a tax-free basis as long as the home is your principal residence.

There is no requirement that you sell a previous home. If you can economically, you can rent the previous home for additional income.

Under the plan, you can choose to take the money either in monthly payments, as a lump sum, a combination of the two or even in a line of credit that you can access whenever you need cash.

There are eligibility requirements. Good health is NOT one of them. However, you cannot be delinquent on any federal debt, and you will have to go through consumer information counseling.

Consider all options before pursuing this alternative. Keep in mind the high costs of reverse mortgages (and the complexity of the transaction). 

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