HECM for Purchase transactions are not as complicated as they're made out to be, but their mechanics can feel a bit foreign to lenders that work primarily with traditional "forward" mortgages. Here's the lowdown on this increasingly timely loan program.
As projected lifespans in the United States approach eight decades, many baby boomers face the daunting task of stretching their retirement assets over 20- or 30-year horizons. What few mortgage lenders realize is they may be uniquely positioned to offer retirement-age consumers financial relief. [paragraph] That relief can come in the form of the Department of Housing and Urban Development (HUD)-insured HECM (Home-Equity Conversion Mortgage) for Purchase. [paragraph] This unique mortgage product has the potential to represent a positive option for borrowers and lenders, because it's both effective at extending retirees' financial resources and profitable for lenders (but not at the borrower's expense). [paragraph] "Nearly 10,000 people turn 62 every day in the United States," says Ted Lange, branch manager and reverse-mortgage specialist at Austin, Texas-based Open Mortgage. "Lenders do a disservice to senior homeowners--and to themselves--by not bringing HECM for Purchase to the table."
This article explores the financial benefits available in retirement to home-owning seniors whether they decide to pursue a strategy of downsizing or upsizing.
First, let's examine the financial benefits for seniors who choose to pursue a plan that includes downsizing their residence. The quick summary is they can invest some of the funds from the sale of their departure home to help fund their retirement and use a HECM for Purchase to secure additional peace-of-mind liquidity.
Here's more detail on how it can be done.
Meet the Smiths
James and Mary Smith, ages 65 and 62, respectively, are contemplating near-term retirement. They decide to sell their current home, worth $200,000, which is larger than they need and may soon require costly upkeep. After Realtor[R] commissions, escrow and closing costs, the Smiths net $186,000 from the sale of their home.
That's a useful chunk of funds, but they still need a place to live. Their CPA suggests renting, but this option holds limited appeal for the Smiths, who have been lifelong homeowners. Instead, the Smiths decide they will downsize into an energy-efficient property that meets their needs and lifestyle changes.
The new property has a $150,000 purchase price. The Smiths could use the $186,000 proceeds from sale of their former home to buy the more modest property outright.
But there's a smarter approach: "A HECM for Purchase will leave the typical downsizing couple with more financial security in retirement and a larger net worth at the end of life," says Joshua Shein, senior director of Ann Arbor, Michigan-based Home Point Financial.
A new home with no monthly payment--and for less cash outlay
Instead of depleting most of their liquid assets to buy the new home outright, the Smiths take out a HECM for Purchase against the new home. Because Mary is on the younger side, the Smiths qualify to receive 52.6 percent of the $150,000 home value, less $7,100 in financing and closing costs--a total of $71,800 in reverse-mortgage funds.
"The older you are, the larger the percentage of money you can get from a HECM for Purchase," says Julie Colangelo, reverse-mortgage training manager for Orange, California-based Essex Mortgage. "But that doesn't mean borrowers should wait. Often, the ideal time to get a reverse mortgage is [when you are] as young as possible, before you've unnecessarily depleted your investments and other retirement savings."
The Smiths apply the $71,800 in reverse-mortgage funds to the purchase of the $150,000 house. They cover the remaining $78,200, considered a down payment, with some of the proceeds from the sale of their former home.
Now the Smiths have a new home with no monthly mortgage payment--and instead of depleting all the funds from their previous home sale, they still have $107,800 to help fund their retirement (see Figure 1).
"As long as the borrowers maintain the new home as their primary residence and keep their property tax, homeowner's insurance and any homeowner association [HOA] fees current, they'll never have to make a mortgage payment," says Lange.
A line of credit that grows over time