Reverse mortgages have many different uses that can accommodate a variety of personal needs, but one particular usage is often overlooked by the general public, and that is using a reverse mortgage to purchase a new home.

In a recent Forbes article, Wade Pfau, professor of retirement income at The American College and frequent reverse mortgage commentator, discusses the practical use of a Home Equity Conversion Mortgage for Purchase and its implications for retirement planning.

At the most basic level, the major benefit of a HECM for Purchase is that it allows homeowners age 62 and older the ability to obtain a reverse mortgage and buy a new home all within a single transaction. But there are also other benefits to this unique product that might not seem so obvious.

“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,” Pfau writes.

The HECM for Purchase could also allow retirees the opportunity to downsize, or even upsize, into a new residence during retirement.

For the downsizers, Pfau notes the H4P could also free up more assets from the sale of the previous home, which could then be invested for future use.

While for those upsizing, and who have the financial resources to manage this sustainably, Pfau notes the H4P could allow for a more expensive home, especially when considering that potential difficulty of obtaining a traditional mortgage after retirement.

“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,” he writes.

Read more at Forbes.

Written by Jason Oliva