April 21st, 2016
At various stages of our lives, we are faced with important decisions for the future. This doesn’t stop just because we get older – in fact, we can have even more important choices to make. After having been in your home for a number of years, the children have moved, the steps present new challenges, and the size may seem unmanageable. Or, you find that you’re retiring and longing for a change of scenery or to be nearer to family. You may own your home outright or have a low balance on your current mortgage. You could always take the proceeds from the sale of your home and buy a new home with all of those funds. This could seriously deplete your cash. Or, you could go the traditional route, put down a small portion, and obtain a “forward” mortgage. You really were not looking forward to a new mortgage payment. What if there was a way to purchase that new home using only some of this cash, but have no monthly mortgage payment?
The Home Equity Conversion Mortgage for Purchase, an FHA-backed program, allows a borrower to purchase a primary residence with a reverse mortgage. If you are at least 62 years old, this option is available to you. The amount required as a down payment varies based on your age, the interest rate, and the value of the home being purchased. If you are 62, the down payment would be roughly 50% of the purchase price. At age 72, that down payment amount would decrease to just over 40%. That’s what makes this type of loan attractive to the buyer who has just sold a home or who has accumulated strong retirement assets.
Let’s look at an example. You own your home that you lived in for 30 years with no outstanding mortgage. You sell your home for $300,000 in your effort to move closer to your grandchildren. You could use the entire $300,000 to purchase a home of similar value with that cash and have no mortgage – but, you’d also have none of the cash from that sale. Instead, as 72-year-old buyers, you could put roughly $125,000 down and get a reverse mortgage for $175,000. This preserves $175,000 from the proceeds to be used for retirement needs and wishes or even daily living expenses. If homes in the new area were more expensive, you could purchase a home worth $485,000 with a $200,000 down payment. You would now own a more expensive home and still have $100,000 left from the sale of your previous home.
The reverse mortgage will require no monthly payments. The interest and the FHA insurance will be added to the loan balance each month, decreasing your equity position in the home, but allowing you, the homeowner, to defer repayment of the loan until the last borrower permanently leaves the home. The homeowner must keep real estate taxes and property insurance current and pay all homeowners’ association fees or related costs. However, these would also have to be paid if you had no mortgage on the home.
Here’s a real life example: The Hollimans were retiring and had grown tired of the harsh St. Louis winters. Their dream home in Lake Worth, Florida would normally have been too expensive for their budget. With the HECM for Purchase, the Hollimans needed only a portion of the purchase price and were able to buy this dream home without monthly mortgage payments. The Hollimans recently shared this story with the Huffington Post.
The HECM for Purchase is only available when you are purchasing your primary residence. There are other requirements for the HECM loan programs, including the requirement for counseling by a HUD-approved counselor prior to application. The features of the HECM for Purchase make this loan more than a mortgage – the loan becomes a retirement tool to help manage cash flow in retirement years. As always, if you have questions on this or any mortgage product, call me.
Buck Wargo “St. Louis Couple Uses HECM Mortgage to Buy Dream Home in Florida” http://www.huffingtonpost.com/buck-wargo/st-louis-couple-uses-hecm-mortgage-to-buy-dream-home-in-florida_b_7662948.html
Janna Herron “Use a reverse mortgage to buy a home?” http://www.bankrate.com/finance/mortgages/use-reverse-mortgage-to-buy-a-home.aspx