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HECM: Another mortgage option for those 62 and older

Chuck and Ellen Rooney originally set out to refinance the mortgage on their home in Decatur, Georgia. But after talking with a reverse-mortgage adviser, the couple discovered that if they took a home-equity conversion mortgage (HECM) for purchase, they could buy a house closer to family without worrying about mortgage payments — as long as they came up with enough to cover about half the purchase price.

If, like the Rooneys, you’re 62 or older, you can use an HECM for purchase to help buy a new home — it must be your primary residence for at least half the year. Lenders will determine the maximum payout, or principal limit, for which you’ll qualify based on the price of your new home (the lesser of the purchase price or appraised value, up to $625,500), your age and your spouse’s age, and the interest rate on the loan.

To get an estimate, use the reverse-mortgage calculator at mtgprofessor.com.

With current interest rates, a HECM for purchase will pay for roughly half of the purchase price of the home for a 62-year-old, Security 1 Lending’s Shelley Giordano said. The older the homeowner and the lower the interest rate, the more you might get. You must cover the remainder from your own funds.

If you take the payout as a lump sum, you’ll incur a fixed rate of interest, which recently hovered around 5 percent. Or you could reserve part of your payout as a line of credit with a variable rate that was recently 2.5 percent to 3 percent. The interest tab accrues over the life of the loan, as does an annual mortgage insurance premium (1.25 percent of the outstanding loan balance) and any servicing fees. All are payable when the loan comes due.

At closing, you must pay the lender’s origination fee and closing costs, as well as an up-front mortgage insurance premium equal to 2.5 percent of the home’s purchase price. If you take less than 60 percent of the maximum payout, the insurance premium falls to 0.5 percent. You can roll those costs into the loan. You’re still responsible for hazard-insurance premiums and property taxes.

When the second spouse moves, dies or sells the home, the loan must be repaid — either the mortgage balance (including accrued charges) or 95 percent of the current appraised value of the property, whichever is less. Options include selling the home to pay the debt, covering it out of pocket or simply handing the keys over to the lender.

Before you can shop an HECM, you must be counseled about the program (go to hud.gov and search for “Find an HECM Housing Counselor”). To find lenders by state, go to reversemortgage.org.

Patricia Mertz Esswein is an associate editor at Kiplinger’s Personal Finance magazine. Send your questions and comments to moneypower@ kiplinger.com. And for more on this and similar money topics, visit Kiplinger.com.

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