When you’re talking to a prospective client and the mortgage topic comes up, how well-versed are you? No one needs help understanding a 15- or 30-year-fixed, and most people know about adjustable rates (ARMs). But what if you’re thrown a curveball by an older homeowner wondering whether a reverse mortgage could work for them? Could you play mortgage professor and explain its intricacies? If not, read on…
Current market conditions in many places are stifling transactions during peak home-buying season. Older homeowners, who would traditionally sell and downsize, are holding onto their homes due to high interest rates, housing and insurance costs and other factors, further limiting housing inventory.
However, growing home equity could be the key to opening up the market and encouraging older homeowners to move into a new home. Many are not aware that a reverse mortgage can be used to buy a new home. This is possible via a financial tool called a home equity conversion mortgage (HECM), a type of “reverse mortgage.” It’s a loan that allows qualifying homeowners 62 and older to purchase a new home without a mandatory monthly mortgage payment, and it uses the built up equity in their existing home to do it. It is insured by the Federal Housing Administration (FHA).
A reverse mortgage is a loan available only to senior homeowners that converts a portion of home equity into usable cash in either a lump sum or monthly installments. Borrowers are not required to make monthly mortgage payments, and the loan balance, including any unpaid interest, is not due until a maturity event brings the loan to an end.
Though borrowers may forgo mortgage payments for the life of the loan, they do have financial obligations associated with the loan. They include interest that, if unpaid, accrues on the loan balance. The loan terms require that borrowers continue paying property taxes, fees and hazard insurance. The property must be the borrower’s primary residence, and they must maintain the home. If the homeowner does not meet these loan obligations, then the loan will come due.
When a reverse mortgage borrower passes away, stops living in the home as a primary residence, or sells the home, the loan becomes due and payable. There are several ways to resolve the loan, including selling the home or repaying the outstanding mortgage loan balance through other means.
RISMedia asked James Mittleman, SVP of Retail Sales at Finance of America, the largest reverse mortgage lender in the U.S., to provide in-depth information about HECMs for real estate agents.
What are the benefits from an HECM?
“One of the greatest benefits of HECM for purchase is it allows borrowers to buy a new primary residence without mandatory monthly mortgage payments by using proceeds from the loan combined with a down payment (often funded by the sale of a previous home),” he says. “This can be an ideal solution for retirees looking to downsize or relocate to a home that better fits their lifestyle or physical needs, without straining their monthly cash flow with a mandatory monthly mortgage payment or depleting their retirement savings. HECMs do not require monthly principal and interest payments for as long as the borrower occupies the home purchased as a primary residence and meets loan obligations including property taxes, insurance and maintenance. HECM for purchase may offer both the housing flexibility and the financial peace of mind an older homeowner desires—even in today’s high-rate environment.
“More broadly, reverse mortgages offer a range of benefits for older homeowners. Borrowers can access their home equity as a lump sum, a monthly disbursement or line of credit, depending on their desired outcome. The absence of mandatory monthly mortgage payments can improve monthly cash flow, which is especially valuable for those on fixed incomes. Reverse mortgages can be used to fund home renovations, cover medical or long-term care expenses, help support aging in place or even assist with estate or legacy planning. At its core, a reverse mortgage offers older adults the freedom to stay in their homes for as long as they wish, provided they continue to comply with the loan terms—making it a flexible and often transformative option for retirement planning.”
How overlooked is this particular mortgage?
“An HECM for purchase is often not considered as a means to relocate or downsize into a smaller home by homeowners aged 62-plus,” he says. “Qualified homeowners could greatly benefit from utilizing this type of mortgage product to relocate to a more desirable location or downsize to a smaller home to achieve their personal retirement goals. In the current housing market, older homeowners may be hesitant to move from their current home despite their retirement goals due to higher interest rates, rising insurance and maintenance costs, or concerns that moving will deplete their savings. HECM for purchase offers a path to greater housing flexibility and financial freedom by allowing seniors to leverage the equity in their existing home to transition into a new one—often better suited to their needs—without tapping into cash reserves or retirement accounts.
“Different types of reverse mortgages, such as HECM for purchase, have long been underutilized as financial tools. Whether used for purchasing a home, establishing a growing line of credit or funding long-term care, they offer versatile benefits like multiple payout options, no mandatory monthly mortgage payments and income tax free loan proceeds. As perceptions shift around this category, more older homeowners are viewing it as a proactive and sophisticated part of a broader modern retirement strategy.”
How do you try to spread the word? Through agents, advertising, etc.?
“Many eligible borrowers simply don’t know they can use a reverse mortgage to buy a new home which affords them the opportunity to relocate without monthly mortgage payments, so a big part of our outreach effort is focused on education,” he says. “We’re actively focused on raising awareness of HECM for purchase by educating both the consumer and those professionals that homeowners engage directly with to assist them in reaching their retirement goals. This includes real estate agents and brokers, consumer advocacy groups, and financial advisors through lunch and learns, appearing at industry conference events and partnering with organizations like the Financial Planning Association (FPA). We also provide education through webinars, regional events and targeted communications available to homeowners and professionals.”
How does this mortgage help inventory to improve?
“HECM for purchase can help unlock housing inventory by helping older homeowners relocate or downsize from larger homes—even in a high interest rate environment,” he says. “Right now, many older homeowners feel stuck in larger homes that no longer meet their needs because they’re reluctant to take on a new mortgage or drain their savings. These factors are often perceived as insurmountable and can cause an older homeowner to delay moves they desire to make today. These delays have a broader impact by contributing to the inventory crunch—particularly as this demographic holds a significant share of the U.S.’ housing stock.
“Older homeowners might reconsider their more immediate future plans if they knew they could purchase a new home without mandatory monthly mortgage payments. HECM for purchase enables just that, and it can be helpful for agents and loan officers to include this financial product as an option to consider during conversations with older clients considering moving. Education is the key to helping their clients confidently make a decision about a move, informed about the wide variety of financial products available like HECM for purchase. The broader impact of an older homeowner relocating or downsizing is that it increases the availability of housing suitable for first-time buyers and larger homes that accommodate growing families.”
Other thoughts?
“For real estate and lending professionals, understanding that an HECM for purchase may unlock stalled transactions, convert hesitant sellers into confident movers and open up more inventory for first-time buyers and growing families,” he concludes. “It bridges the gap between housing and retirement planning, and has the potential to play a much bigger role in today’s market. With continued product innovation and increased awareness, creative reverse mortgage solutions like HECM for purchase are becoming a strategic component of modern retirement planning.”
