How you pay for your next home matters – especially if you’re of retirement age. After all, housing costs are usually the first- or second-largest expense for households in retirement. Therefore, the way you pay for your next home can dramatically change how successful and enjoyable your retirement years can be. Up next, learn how a Home Equity Conversion Mortgage for Purchase loan can give you peace of mind and financial stability in retirement like nothing else.
What is a Home Equity Conversion Mortgage for Purchase?
In short, it’s a reverse mortgage loan that allows seniors age 62 or older to buy a new primary residence with loan proceeds from the reverse mortgage. This kind of loan originated out of a home equity loan – the Home Equity Conversion Mortgage (HECM) – that the federal government developed exclusively for seniors and passed into law in 1988. Twenty years later, the HECM loan added a new variation that gave senior homeowners the same advantages of the traditional HECM reverse mortgage but added the option to buy a new home. This loan is called the Home Equity Conversion Mortgage for Purchase. And it’s the focus of this article.
The Backstory
According to the National Association of Realtors, most homebuyers are financing their new home purchases even if they are 65 or older. Today, the majority of retiree homebuyers are using conventional financing to pay for their new home. In addition, over 40% of retirement age homeowners are still carrying mortgage debt. That number has certainly increased over the last several decades. It grew worse by the financial crisis of 2008 and its impact on home values and retirement portfolios.
A Better Way
What if everything you once thought you knew about owning a retirement home was incorrect? How soon would you want to know about a better solution? This solution could help protect your other assets and create a better lifestyle for you to savor. Most seniors looking to buy a home are only aware of the two traditional ways to pay for it. The first way is to pay the seller for the new home upfront in cash. The second and more common way is to take out a traditional mortgage loan and make monthly payments until you pay the loan back in full.
However, for more than a decade, there’s been another option available to homebuyers at least 62 or older. This option allows them to make a large one-time down payment based on their age and current interest rates – but not be responsible for a monthly principal and interest payment in the future. Connected the dots yet? This final and more enticing way is the Home Equity Conversion Mortgage for Purchase.
The Home Equity Conversion Mortgage for Purchase combines the best features of the first two options. It also creates additional liquidity and eliminates the additional monthly cash flow requirement for a monthly mortgage payment. You are still required to make your normal property charge payments (property taxes, homeowners insurance and any HOA fees), just as if you had used one of the other options. But making a principal and interest payment is now optional. Without this obligation, you’ll be able to save lots of money each month and enjoy more financial flexibility than ever.
The Wrap
Now that you know about the Home Equity Conversion Mortgage for Purchase loan, try reaching out to a financial advisor. This person can run the numbers on all three home purchase options and see which is best for you. It also would be prudent for your advisor or CPA to look at the tax planning possibilities that this loan might create for you or your heirs. For example, large one-time interest deductions might be available when paying off some or all of the loan.
Buying that new home is about so much more than the financial side of it. It’s where you spend time having family gatherings. Or enjoying that new grandchild. Maybe it’s where you host friends for dinners and holidays. Or maybe it’s the place you care for someone you love. These are the most important things in life, and having extra money freed up to help pay for them will help you enjoy them on a larger scale.
For more info on reverse mortgage loans, please contact us at Fairway of the Carolinas. Also, check out this article, which dispels a number of the myths commonly associated with reverse loans.
