The HECM reverse mortgage purchase program enables homeowners 62 and older to finance a house without making monthly mortgage payments. Sound absurd? Read on!
The HECM is primarily known as a method for homeowners to access the equity in an existing house. Few people are aware that you can finance a house purchase using the HECM without making a mortgage payment. How? With a HECM, or home equity conversion mortgage (often pronounced heck-um by industry insiders). The most popular reverse mortgage product in America is the HECM that is FHA-insured.
Let's first go over some key HECM fundamentals before we go into how a reverse mortgage information and home purchase works. Here you can also get more thorough and in-depth details on reverse mortgages.
What a HECM Does
A HECM is, first and foremost, just a home loan. With this special mortgage product, you can access the equity in your home and use it to improve your retirement lifestyle and financial stability.
As long as at least one borrower resides in the property, pays the property taxes, and maintains homeowner's insurance, no mortgage payments are necessary.
Your home will always be legally yours, so you may always leave it to your heirs. By paying off or refinancing the HECM balance, your heirs can keep the house. The lender may sell the house if your heirs decide they don't want it or don't want to deal with selling it. When the house is sold, the loan balance is settled, and whatever equity that is left over is added to your estate.
The maximum that will ever need to be repaid for the HECM is the value of your home because it is a non-recourse loan. If the value of your house is insufficient to cover the entire loan, FHA will make up the difference.
How to Buy a Home With a Reverse Mortgage
After going over the fundamentals, let's examine how a reverse mortgage home purchase functions. The idea is straightforward: the bank finances a portion of the purchase price, and you pay the balance plus closing charges.
Let's look at an example to see how this functions. Assume that David, a 70-year-old home buyer, paid $400,000 for his new house. Our HECM purchase calculator allows us to calculate the bank's financing commitment of $194,400. The principal limit is the amount in question.
David's down payment, or $205,600, is the sum of the principal limit and the purchase price. Closing costs differ greatly based on the state of the interest rate market and the location of the home, so let's assume the down payment plus closing charges come to $222,400. David's cash to close is this sum.
To put it another way, David will contribute $222,400 to the closing and the bank will finance the remaining $194,400. As long as David maintains homeowner's insurance and pays the property taxes, he is exempt from making mortgage payments.
At this point in my explanation, at least one individual, in my experience, usually objects: “That down payment is crazy! With a 20% down payment, I could purchase a property right now. Of course you may, but not without making a mortgage payment. Since no mortgage payments are necessary, the HECM loan-to-value percentages are lower. Consider this: the bank is extending a loan of several hundred thousand dollars without demanding a mortgage payment every month for a number of years. Because there are no mortgage payments necessary, HECM loan-to-value ratios are more conservative.
Every HECM is unique since the principal limit is determined by age, current interest rates, and the price of the home sold. A typical main limit for HECM applicants is about half the purchase price. You will probably be eligible for more than half if you are older. On the younger end of the curve, your eligibility will likely be lower.
A higher purchasing power and sense of security
The HECM for purchase provides more financial protection and higher purchasing power. Your monthly cash flow determines how you will live in retirement. In other words, you can spend the money you have left over after paying all of your expenditures on enjoyable activities. You should have more financial freedom the more monthly cash flow you generate, right? The HECM keeps more money in your pocket each month because it doesn't demand a monthly payment. This means you have more money to spend on enjoyable activities and put aside for unforeseen costs.
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