By Sharyn Brunk, Realtor
An attractive financing option that’s gaining a lot of attention is the Home Equity Conversion Mortgage for Purchase (HECM). It’s often a good fit for mature adults who have built up equity in their current home but have a fixed income, or have plenty of income but don’t want to use it on a mortgage payment. They can take that money and use it to travel, enjoy their bucket list, help with a grandchild’s education, or otherwise invest the money, without sacrificing a comfortable home.
Truly, the idea is to make the most of your retirement years. But what is everyone’s biggest fear? We all fear running out of money if we are fortunate enough to live longer.
Here are the facts:
- Choose the house that fits your needs, perhaps even upgrade to a new home.
- Put down roughly 60% of the purchase price—and you never had to make another mortgage payment. Your age determines the size of the required down payment.
- Sell the home at any time. You can sell the house for what it is worth, pay off the mortgage, and keep the difference. If the house sells for less than what is owed on the mortgage, you or your heirs are not liable for that debt.
How does it work?
- Instead of making a principal and interest (P&I) mortgage payment each month on your newly acquired home, the interest accrues onto the mortgage balance.
- The mortgage balance grows over time; equity decreases.
- The value of the home should also be growing at the same time but not typically at the higher rate of interest that the bank charges. Remember, there is no fear that the equity will go negative because your mortgage company is fully insured for any loss by the FHA (Federal Housing Administration).
- If your equity is down to zero when your home is sold, the deed is simply turned over to the mortgage company (i.e., the bank). Alternatively, your spouse can stay in the house as long as he/she wants.
What does it cost?
Well, it should be clear that your original equity in the newly acquired home (your original down payment) is eroding each month. If you had hoped to leave full value in the house to your children or sell your home should you be burdened by heavy healthcare costs, it’s important that you save or invest those mortgage payments you would have had to make on a traditional mortgage but are not making with HECM.
Additionally, you will pay 2% of the purchase price of the home and one-half percent per year of the mortgage balance into the FHA insurance fund. But you don’t actually “pay” it. This, as well as other closing costs, is accrued on the mortgage balance. And, your loan rate may be 1% greater than typical mortgage rates—but you won’t see this either because there are no payments of any kind.
How do you qualify?
- First and foremost, you must be able to make the down payment.
- You or your spouse must be at least 62 years old.
- The new home must be your primary residence.
- Like any mortgage application, the bank will look at your assets, income, and debt to ensure you can afford the taxes, insurance, and homeowners’ dues on the house. In any mortgage, you must be able to maintain your home so it does not lose value.
Your real estate agent can guide you through the HECM approval process, appraisal, and closing—the routine necessary steps to procure any mortgage. A HECM loan officer can aid you with your initial investigation. All HECM applicants must attend, in person or over the phone, a short educational seminar to ensure they understand the implications of the HECM plan.
If HECM peaks your interest, you should discuss this with your financial advisor. Do not be surprised if your advisor or real estate agent has not heard of HECM. It’s fairly new, and it is unique in that many banks do not offer it. Resources are available online or through word of mouth to point you in the right direction. Visit the HECM Program website to download more information and watch testimonials from folks that have used the program. HECM can also be used to refinance your current home.
Sharyn Brunk is a North Carolina Real Estate Broker with Helen Adams Realty. She can be reached at www.sharynbrunk.com or (919) 605-5246.