If you’re over 62, it’s possible to finance a home purchase with no mortgage payment using the HECM for purchase. You bring your down payment and the bank finances the rest with no mortgage payment. Sound crazy? Read on! We’ll explain how it works and the possible pros and cons.
The purchase HECM is one of the best-kept secrets of the mortgage industry, in my opinion. It’s a great way to finance a home purchase in retirement, but relatively few people even know about it. It increases your purchasing power, improves your monthly cash flow, and helps you keep more money in the bank to help protect your retirement lifestyle and financial security.
There is a lot of misinformation out there about the HECM. Let’s cover a few basics, then we’ll dig into some HECM for purchase specifics and pros and cons.
Table of Contents
- What is a HECM?
- How a HECM Works
- How Does the HECM for Purchase Work?
- HECM for Purchase Pros and Cons
- How Much Is My Down Payment?
What Is a HECM?
The FHA-insured HECM (or heck-um, as industry insiders call it) is the most popular reverse mortgage product in the United States today. If somebody you know recently got a reverse mortgage, they likely got a HECM.
The HECM, or home equity conversion mortgage, was signed into law by President Reagan as part of the Housing and Community Development Act of 1987. The Federal Housing Administration (FHA) insures and regulates the HECM under the authority of the Department of Housing and Urban Development (HUD).
Over 50,000 seniors get HECMs every year in America today. That number will likely grow as more seniors learn about the program.
How a HECM Works
The HECM is a unique mortgage product that unlocks home equity so you can use it to enhance your retirement lifestyle and financial security.
No mortgage payments are required as long as at least one borrower (or non-borrowing spouse) lives in the home and pays the required property charges.
You always remain the owner of your home. You can leave your home to your heirs and they can choose to either keep it or sell it.
If your heirs wish to keep the home, they can pay off or refinance the reverse mortgage balance. If your heirs don’t want the home, they can sell it themselves or let the lender sell it.
The HECM is a non-recourse loan; the most that will have to be repaid is the value of your home. FHA covers any shortage if your home isn’t worth enough to pay off the entire loan balance.
The HECM is flexible and customizable; there are multiple ways to tailor it to your financial goals and needs.
If you already own your home, you can use the HECM to tap into home equity without a mortgage payment or selling the home. This is the most common way that seniors use the HECM. Payout options include lump sum, line of credit, term/tenure income, or a combination of all of these.
And, of course, you can use the HECM to finance a home purchase without a mortgage payment.
How Does the HECM for Purchase Work?
Most people use a HECM to tap into the equity of a home they already own. Fewer people know that you can also use the HECM to buy a home. How it works is simple: the bank finances a certain amount and the rest plus closing costs is your down payment.
Again, there are no mortgage payments as long as at least one borrower (or non-borrowing spouse) lives in the home and pays the property charges.
The size of your down payment depends on how much you qualify for. How much you qualify for depends on several factors, including home value/purchase price, age of the youngest borrower (or non-borrowing spouse), expected interest rate, and the HECM program you select.
The HECM tends to offer more money when interest rates are lower. In other words, down payments tend to decrease as interest rates fall.
Older borrowers tend to qualify for more than younger borrowers. This means that older borrowers typically have smaller down payments than younger borrowers.
Most HECM borrowers tend to qualify for between 35% to 50% of the purchase price in today’s market. The typical borrower will need a down payment of 50% to 65% of the purchase price plus closing costs. The exact amount varies depending on age and current interest rates.
If you’d like to get a down payment estimate, check out our HECM for purchase calculator.
HECM for Purchase Pros and Cons
In my opinion, the HECM for purchase is a great program. I think anybody willing to look at it honestly will come to the same conclusion. However, not everybody is the perfect candidate for a HECM. Let’s cover some potential pros and cons.
Purchase HECM “Pros”
In my opinion, the upsides of a purchase HECM greatly outweigh the downsides. The purchase HECM offers increased purchasing power, improved monthly cash flow, and it helps you keep your cash in the bank to help protect your retirement lifestyle.
- Increased purchasing power. The HECM for purchase allows you to buy more home than you could otherwise afford. Because there’s no payment, you’re not limited by your cash or how much of a payment you can afford. For example, let’s say you have just $200,000 to buy a home and you want to avoid a mortgage payment. Normally, you would be limited to homes priced at $200,000 or less. But what if you can finance part of the purchase price with no mortgage payment? That enables you to spend more than $200,000 and still not have a mortgage payment. The HECM for purchase increases your purchasing power.
- Improved monthly cash flow. Again, there are no mortgage payments as long as at least one borrower or non-borrowing spouse lives in the home and pays the property charges. Again, you’re financing a home purchase with no mortgage payment. This means you get to keep more of your retirement income in your pocket instead of spending it on a mortgage payment for the next thirty years.
- Keep more cash in the bank. Normally, you have to buy a home outright with 100% cash to avoid a mortgage payment. The HECM allows you to finance part of the purchase price without a mortgage payment. This means you don’t have to buy the home outright to avoid a mortgage payment. This enables you to keep more cash in the bank to finance your retirement lifestyle. More cash in the bank means more financial security for you.
Purchase HECM “Cons”
So, what are the possible downsides of a HECM for purchase? The most common criticism of the HECM in general is typically the closing costs. I’ll cover some other supposed downsides, but they’re not really downsides per se. They’re more a question of suitability. There are a lot of great financial products that may be bad for you because they’re not a good fit for your financial goals. That’s true of the HECM as well. If it’s not a good fit, it doesn’t make it a bad product. It’s just not good for you specifically.
- Closing costs. This is the most common HECM criticism. Yes, the closing costs can be high, but they’re not always high. How much the closing costs are depends on the purchase price, location, and current rates. A HECM typically has three categories of closing costs: IMIP, origination, and third party costs.
- Reduced home equity in the future. This isn’t a true downside, in my opinion, because it’s the whole point of the HECM in the first place. When you purchase a home with a HECM, the equity in your home is essentially paying the mortgage so you don’t have to out of your pocket. Naturally, you’ll have less equity in the home over time than if you paid cash or financed with a traditional “forward” mortgage. Again, that’s the point, right? If you’re concerned about having less equity in the future, the HECM may not be a good fit.
- Larger down payment. I don’t see this as a true downside, either. Yes, you can finance a purchase with a smaller down payment, but it will come with a mortgage payment. The HECM requires a larger down because there’s no mortgage payment. That’s not a downside, it’s just how it works. You have to weigh what makes sense for you: put less down and pay a mortgage payment, or put more down and not have a mortgage payment?
There are some other unique situations where a HECM may not be the best fit. They don’t come up a lot, but if you’re interested, you can read about them here.
How Much is My Down Payment?
In my opinion, the HECM for purchase is a great financing option. It offers greater purchasing power and improved monthly cash flow. It also enables you to keep more money in the bank to help protect your retirement lifestyle and financial security. If you’d like to estimate your down payment, check out our HECM purchase calculator.