Welcome to a continuation of a 3-part series designed to provide an overview of the FHA-insured Home Equity Conversion Mortgage, the HECM loan commonly known as the Reverse Mortgage.
In this session, we are going to discuss side 3 of the HECM Equity Triangle, the option that enables senior homeowners to use the HECM home equity loan to purchase a new home such as downsizing to a condo or a senior living environment.
Let’s remember that the Reverse Mortgage, which we previously discussed in part 1, is essentially called a reverse mortgage because the homeowner can actually “reverse” the flow of funds with the home equity Lender. Instead of making monthly mortgage payments to a lender, the homeowner can enter into an agreement in which the available home equity can be converted into a life expectancy draw in which a portion of home equity can be distributed to the homeowner on a monthly basis.
In part 2, we looked at the option to create a HECM Line of Credit that, unlike a local bank’s home equity line of credit or HELOC, cannot be modified or cancelled in the event that the home’s valuation declined. So now let’s take a closer look at option #3 of the Home Equity Conversion Mortgage, the option that lets a senior homeowner purchase a new home with much less cash at the closing table.
Here’s an interesting fact about the elders. I call those over age 75 “The Elders” to separate them from the aging group known as the Baby Boomers.
The Elders have always been risk averse and debt averse. They simply do not like debt. But, my group, the Baby Boomers, have never known a loan we didn’t love! Right!? All baby boomers had to do was borrow money and buy something, let it ride up in value, then sell at a profit. Easy, right!? Well, turns out it wasn’t so easy. Just ask the 25% of baby boomers now age 54-65 who have not been able to save a dime for retirement.
So, here’s the scenario. Let’s say an elder couple sells their single family home and generates $200,000 from the sale. Now they want to buy a condo, let’s say a $200,000 condo. Normally, since the elder would likely say, “I don’t want a mortgage”, they will go to the closing table with all cash. They will write a check for $200,000 and proudly buy the new property outright.
Look. That’s crazy! These retirees just took $200,000 out of the ground from the sale of their home. And now, they are going to pour that money right back into the ground. Poof! The cash is gone. Now what?
What about the cash needs for senior health care and for lifestyle expenses in the elder years? Once that money is poured back into the ground, it may never be able to be extracted again.
So here is what the Home Equity Conversion Mortgage will offer to this buyer. We say, “wait a minute Mr & Mrs Retirement Home Buyer, let’s use a very special mortgage to buy that retirement condo”. Based on your age and other terms of the loan, let’s use the HECM for Purchase program to provide a mortgage for, say, $130,000 of that purchase price.
So now, instead of using all of your cash, you could write a check for only $70,000 at settlement. Think about this. You could buy a $200,000 condo with a $70,000 check. You could put that other $130,000, the money that you were going to bury back into the ground, back into your pocket to use for retirement and health care issues.
And, now you have a perfect space to live out your elder years. Plus an incredible option. Generally, you never have to pay the mortgage off unless you vacate the property, sell it at some later date, or die.
So, why do you care?
And, besides, when could you ever pull $130,000 out of that condo in some future year? It’s as simple as that. You can use the HECM for Purchase option to downsize, or what we call “right size” to a smaller home, keep your cash more readily available, and live your senior years with greater security. An option worthy of your consideration, for sure.
You can learn more about the HECM Line of Credit and the other options relating to the HECM Equity Triangle by visiting www.SeniorLifestyleMortgage.com. There you can find additional insights, white papers, blog articles and more. I will look forward to seeing you there.
So this concludes session #3 of the 3-part Podcast Series relating to the major components of the Home Equity Conversion Mortgage.
This has been Bill Hornbeck, your reverse mortgage expert.
So long… Let’s continue...