April 10, 2019 by HECM Pro
If you’re at least 62 (or married to somebody who is), the HECM for purchase program could be a really great way to buy a home. The HECM allows you to finance a home purchase without a mortgage payment, which means you can keep more money in the bank and/or purchase more home than you could otherwise afford.
The HECM Purchase Explained
The acronym “HECM” stands for home equity conversion mortgage. The HECM, which is FHA-insured and regulated, is the most popular reverse mortgage program in the United States today.
The HECM is normally used by seniors 62 or older to tap into the equity of a home they already own without giving up ownership or taking on a mortgage payment. Relatively few people know that the HECM can also be used to purchase a home.
Now, why would you want to purchase a home with a HECM reverse mortgage? Because it enables you to finance a home purchase without a mortgage payment. The bank finances a portion of the purchase price and you bring in the rest (plus closing costs) as your down payment. No mortgage payments are required as long as at least one borrower (or non-borrowing spouse) is living in the home and paying the required property charges.
You always remain the owner of the home and you’re free to leave it to your heirs. Your heirs will inherit the remaining equity in the home.
The HECM is a home loan, so it has an interest rate like any other home loan. HECM interest rates are usually pretty comparable to traditional 30-year fixed interest rates.
If you choose not to make a mortgage payment (which is the point, right?), the interest simply accrues onto the loan balance over time. The HECM essentially shifts the burden of the mortgage payment from your monthly income onto the equity in your home. The home is now paying the mortgage “payment” instead of you!
How much of a down payment do I need?
Your down payment is the difference between the purchase price and the amount you qualify for plus closing costs. How much you qualify for depends on the age of the youngest borrower (or non-borrowing spouse), current interest rates, and the HECM program (variable-rate HECM or fixed-rate HECM) you select.
Most HECM borrowers tend to qualify for between 45% to 55% of the purchase price. That means your down payment likely will be between 45% to 55% and the rest will be financed with no mortgage payment.
Older borrowers tend to qualify for more, which means their down payments are usually less than younger borrowers. Borrowers also tend to qualify for more when interest rates are low, which reduces down payments.
If you would like to get a down payment estimate, check out our reverse mortgage purchase calculator.
Why HECM for purchase is attractive
HECM for purchase is an attractive program because it enables you to preserve your liquid assets.
Normally, if you want to buy a home without a mortgage payment, you have to pay cash. The HECM enables you to finance part of the purchase price and still avoid a mortgage payment. This enables you to keep more of your cash in the bank where it can be used to fund your retirement lifestyle.
The HECM for purchase program also allows you to buy more home than you could otherwise afford. Your purchasing power is not limited by a mortgage payment or your cash on hand.
Think about it: if you have only $200,000 to buy a home and you want to avoid a mortgage payment, you can only buy a home priced at $200,000 or less. But what if you could finance part of the purchase price with no mortgage payment? That enables you to spend a lot more than $200,000. If your down payment is roughly half the value of the home, that means you could purchase up to a $400,000 home – and not have a mortgage payment! That certainly opens up some possibilities, does it not?
Realtors, are you paying attention?
If you’re at least 62 and planning to buy a home, you might consider the HECM. It can help you avoid a mortgage payment and keep more cash in the bank to fund your retirement lifestyle.