A Home That Makes Sense
©2017, Sharyn L. Brunk
Have your housing needs evolved over the last ten years? Are you thinking about a home closer to family, a single-level ranch, or less maintenance all around? Or perhaps you dream of an active lifestyle in a warm climate. Did you know there are “age 55+” communities where the landscaping is fully maintained, and even some, where the single family house is maintained on the exterior—yes, a single family home that is actually a condo! Many of these communities have full recreational facilities. Now there is an attractive financing option that could make sense for mature adults that have built up equity in their current home but have fixed income, or have plenty of income but don’t want to use it on a mortgage payment. They can take that money and use it to travel, enjoy their bucket list, help with a grandchild’s education, or otherwise invest the money, but still not sacrifice a comfortable home.
Truly, the idea is to make the most of your retirement years. But what is everyone’s biggest fear? We all fear running out of money if we are fortunate enough to live longer.
Here we will explore a financing option called a Home Equity Conversion Mortgage for Purchase (or HECM for Purchase). Basically, you choose the house that fits your needs, perhaps you even upgrade to a newer home. Then, for a down payment on this house, you put down roughly 50-60% of the purchase price—AND YOU NEVER HAVE ANOTHER MORTGAGE PAYMENT. You can sell the home at any time. There is no pre-payment penalty. You sell the house for what it is worth, pay off the mortgage, and keep the difference. If the house would sell for less than what is owed on the mortgage, you or your heirs are NOT liable for that debt. If you want to sell the house and move somewhere else, you can do that. And you can use HECM again! Are you thinking, “How can that be? I don’t believe it.” HECM is a program that the federal government put in place following the 2008 housing crash. It is funded, not by your tax dollars, but by families that take advantage of this creative financing.
How does it work? Basically, instead of making a principal and interest (P&I) mortgage payment each month on your newly acquired home, the amount is accrued onto the mortgage balance. The mortgage balance grows over time; equity decreases. The value of the home should also be growing at the same time but not typically at the higher rate of interest that the bank charges. But remember, there is no fear that the equity will go negative (as was so prevalent in 2008) because your mortgage company is fully insured for any loss by FHA (Federal Housing Administration). If your equity is down to zero, or below zero, at your death or, perhaps when you move out of the house into a care facility, the deed is simply turned over to the mortgage company (i.e., the bank). Alternatively, your spouse can stay in the house as long as she wants.
What does it cost? Well, it should be clear that your original equity in the newly acquired home (your original down payment) is eroding each month. If you had hoped to leave full value in the house to your children, or sell your home should you be burdened by heavy health care costs, it’s important that you save or invest those mortgage payments you would have had to make on a traditional mortgage but are not making with HECM. Additionally, you pay 2% of the purchase price of the home, and one-half percent per year of the mortgage balance, to the FHA insurance fund. But you don’t actually “pay” it. This and other closing costs are accrued on the mortgage balance. And, your loan rate may be 1% greater than typical mortgage rates—but you won’t see this either because there are no payments of any kind.
Don’t feel like you have to get into this program early, such as right when you turn 62. The amount of your down payment varies based on your age—the younger you are, the higher your down payment. This is simply based on actuarial tables for how long you will live. For example, assume you are purchasing a home for $350,000. If you are 70 years old, your down payment is $197,648 (APR 5.856%). If you are 62 years old, the down payment is $215,000 (APR 5.786%). And that is all you ever pay towards financing this home.
How do you qualify? First and foremost, you must be able to make the down payment. You or your spouse must be at least 62 years old. The new home must be your primary residence. Like any mortgage application, the bank will look at your assets, income and debt to ensure you can afford the taxes, insurance, homeowners’ dues on the house. In any mortgage, you must be able to maintain your home so it does not lose value. Your real estate agent can guide you through the HECM approval process, appraisal, and closing—the routine necessary steps to procure any mortgage. A HECM loan officer can aid you with your initial investigation. Every HECM applicant must attend, in person or online, a short educational seminar to ensure you understand the implications of the HECM plan.
Interestingly, because you need only come up with a little more than half of what the new home is worth, you may be able to purchase the new home while you still own your existing home, making the physical transition to the new home much easier. If you are building a new home, the HECM plan may allow you to choose upgrades, a larger floor plan, or a nicer lot because you are only paying approximately half for what these upgrades actually cost! It’s pretty incredible.
If HECM peaks your interest, you should discuss this with your financial advisor. Do not be surprised if your advisor or real estate agent has not heard of HECM. It’s fairly new, but it is unique in that many banks do not offer it. Resources are available online or through word of mouth to point you in the right direction. This website, www.hecmprogram.com will allow you to download more information and watch testimonials from folks that have used the program. HECM can also be used to refinance your current home.