If you’re an American homeowner 62 or older, the HECM reverse mortgage purchase program enables you to finance a home without a mortgage payment. Sound crazy? Read on!
Most people know the HECM as a tool for tapping into the equity of a home they already own. Few people know that you can also use the HECM to finance a home purchase with no mortgage payment. How? With a home equity conversion mortgage, or HECM (often pronounced heck-um by industry insiders). The FHA-insured HECM is the most popular reverse mortgage product in America.
Before we dig into how a reverse mortgage home purchase works, let’s cover a few relevant HECM basics. You can also find more comprehensive and detailed information about reverse mortgages here.
How a HECM Works
First of all, a HECM is simply a home loan. It’s a unique home loan that enables you to unlock your home equity and use it to enhance your retirement lifestyle and financial security.
No mortgage payments are required as long as at least one borrower lives in the home and pays the property taxes and homeowner’s insurance.
You always remain the title owner of your home, which means you can leave it to your heirs. Your heirs can keep the home by paying off or refinancing the HECM balance. If your heirs don’t want the home and don’t want to hassle with selling it, the lender can sell it. Once the home is sold, the loan balance is paid off, and any remaining equity goes into your estate.
The HECM is a non-recourse loan; the most that will ever have to be repaid is the value of your home. FHA will cover the shortage if your home isn’t worth enough to pay off the entire balance.
How the Reverse Mortgage Home Purchase Works
Now that we’ve covered some basics, let’s dig into how a reverse mortgage home purchase works. The concept is simple: the bank finances a portion of the purchase price and the remainder plus closing costs is your cash to close.
To see how this works, let’s check out an example. Let’s assume we have a 70-year-old home buyer named David and a home purchase price of $400,000. Using our HECM purchase calculator, we determine that the bank will finance $194,400. This amount is called the principal limit.
The difference between the principal limit and the purchase price is David’s down payment, which equals $205,600. Closing costs vary widely depending on interest rate conditions and property location, but let’s assume the down payment and closing costs total $222,400. This amount is David’s cash to close.
In other words, David will bring $222,400 to closing and the bank will finance the remaining $194,400. No mortgage payments are required as long as David lives in the home and pays the property taxes and homeowner’s insurance.
In my experience, there is always at least one person who objects at this point in my explanation: “that down payment is ridiculous! I could buy a home right now with a 20% down payment!”. Absolutely, yes, you can – but not without a mortgage payment. The HECM loan-to-value percentages are lower because no mortgage payments are required. Think about it: the bank is lending hundreds of thousands of dollars without requiring a monthly mortgage payment for potentially decades. HECM loan-to-values are more conservative because no mortgage payments are required.
Because the principal limit is calculated based on age, current interest rates, and the home sales price, every HECM is different. Most HECM applicants can expect a principal limit of roughly half the purchase price. If you’re older, you’ll probably qualify for more than half. If you’re on the younger end of the curve, you’ll probably qualify for less.
Increased Purchasing Power and Financial Security
The HECM for purchase offers increased purchasing power and greater financial security. Your retirement lifestyle depends on your monthly cash flow. In other words, the money you have left after all the bills are paid is the money you can spend on fun things. The more monthly cash flow you have, the more financial freedom you have, right? Because the HECM doesn’t require a monthly payment, it keeps more money in your pocket on a monthly basis. That means you have more money to do fun things and save for unexpected expenses.
The HECM for purchase also significantly increases your purchasing power. As an example, let’s assume Betty has $200,000 to spend on a house and wants to avoid a mortgage payment. In a world without the HECM, she would be limited to homes priced at $200,000 or less. The HECM for purchase essentially doubles her purchasing power. Betty can spend that same $200,000 cash, but instead, get a $400,000 home and still not have a mortgage payment. How cool is that?
The HECM for purchase also enhances your long-term financial security by helping you stay more liquid. To show you how this works, let’s assume Albert is planning to buy a home that costs $400,000. In a world without the HECM, Albert would need over $400,000 in cash to buy the home, cover his closing costs, and avoid a mortgage payment. Albert has the money to buy the home outright, but here’s the problem: he would be locking away a large chunk of his net worth in non-liquid home equity. It’s great to have a free and clear home, but every dollar locked away in home equity is a dollar unavailable to pay for travel, home improvements, and unexpected expenses. If Albert uses a HECM to buy the home, he can spend just $200,000 of his cash, avoid a mortgage payment, and keep $200,000 in the bank. This keeps him more liquid, which improves his long-term financial security. When you have money in the bank, you can more easily absorb unexpected expenses such as home repairs and medical bills.
The Best Kept Secret in the Mortgage Industry
I’m sure you can tell by now that I think the HECM for purchase is a great loan product. Again, I think it’s one of the best kept secrets in the mortgage industry. If you’re over 62 and considering a home purchase, check out the HECM for purchase. I’ll think you’ll find that it increases your purchasing power, improves your retirement lifestyle, and enhances your long-term financial security. If you’d like an estimate of how much you can qualify for, check out our HECM for purchase calculator.
Originally posted at Sixty and Me.