Seniors often face many decisions when it comes to retirement. For example, will they be able to remain in their current home and age in place comfortably, or does it make more sense to downsize and free up their equity. Fortunately, a Home Equity Conversion Mortgage (HECM), also known as a reverse mortgage, could be a solution for both of these scenarios.
A HECM is a federally insured mortgage loan that allows homeowners 62 years of age or older to convert a portion of their equity into cash without having to make monthly mortgage payments.1 It is similar to a traditional mortgage in that a HECM uses the borrower’s home as collateral. However, unlike a traditional mortgage, borrowers do not have to repay the loan balance until they sell the house, move out of the home as their primary residence or pass away. One of the main reasons seniors tap into their home equity through a HECM is to pay off their existing mortgage. Freeing up these funds increases their monthly cash flow and can help to supplement retirement income.
A HECM can also be used to purchase a new home. The HECM for purchase enables homeowners to use the equity from the sale of a previous residence to buy their next primary home in a single transaction with one initial investment (down payment).
Let’s take a look at how a HECM would work in each of these scenarios to help Don and Shirley increase their monthly cash flow. In these examples, Don and Shirley are both 75 years old.
First, let’s look at a HECM Refinance example. In this example, they have a mortgage balance of $95,000 and their home is valued at $350,000.
HECM Refinance2
| Home Value | $350,000 |
| Available Loan Amount | $214,900 |
| (Principal Limit) | |
| Total Settlement Costs | $9,938 |
| Available Loan Proceeds | $204,962 |
| Mortgage Payoff | $95,000 |
| Proceeds from HECM Refinance | $109,962 |
| Remaining Home Equity | $135,100 |
| Monthly Mortgage Payment | $0 |
By using a HECM refinance, Don and Shirley will be able to pay off their existing mortgage of $95,000, and still receive $109,962 in proceeds from the HECM loan. They can choose to receive their loan proceeds as a line of credit, monthly payments, or a combination of these options. The unused portion of the line of credit will grow over time, allowing Don and Shirley to increase their borrowing capacity.
Now let’s look at a HECM for Purchase example. In this example, Don and Shirley purchased a new home for $280,000.
HECM for Purchase3
| Home Purchase Price | $280,000 |
| Available Loan Amount | $171,920 |
| (Principal Limit) | |
| Total Settlement Costs | $14,488 |
| Available Loan Proceeds | $157,432 |
| Cash Required to Close | $122,568 |
| Proceeds from Sale of Home | $234,000 |
| Remaining Proceeds After Purchase | $111,432 |
| Monthly Mortgage Payment | $0 |
Don and Shirley can use the proceeds from the HECM for purchase loan of $157,432, combined with a cash investment of $122,568, to purchase a new home for $280,000 with no monthly mortgage payments.1 The HECM for purchase allows Don and Shirley to downsize, while still having $111,432 left over from the sale of their previous home.
In either scenario, Don and Shirley are able to access their home equity to achieve their goal of increasing their cash flow. The option they choose will depend on many factors. Some of the questions Don and Shirley should think about are: What are their goals in retirement? Do they want to stay in their current home? Is the size of their current home manageable and does it require renovations? Do they need to make home improvements due to health related conditions, i.e. wheelchair access? Will moving allow them to be closer to family?
If you would like to learn more about a HECM loan, please use our Reverse Mortgage Calculator or call us at 800-218-1415. You will receive a free no-obligation loan assessment to help you make an educated decision, and determine whether a HECM is right for you.
1 You must live in the home as your primary residence, continue to pay required property taxes, homeowners insurance and maintain the home according to Federal Housing Administration requirements.
2 This example is based on the youngest borrower, who is 75 years old, a variable rate HECM loan with an initial interest rate of 3.305% (which consists of a Libor index rate of 0.680% and a margin of 2.625%). It is based on an appraised value of $350,000, origination charges of $5,500, a mortgage insurance premium of $1,750, other settlement costs of $2,688, a mortgage payoff of $95,000; amortized over 144 months, with total finance charges of $83,919.28 and an annual percentage rate of 5.33%. Interest rates may vary. The stated rate may change or not be available at the time of loan commitment or lock-in. The funds available to you may be restricted for the first 12 months after loan closing, due to HECM requirements. Consult a Liberty advisor for detailed program terms. Since the initial disbursement at closing and during the first 12-month disbursement period is 60% or less of the principal limit, the mortgage insurance premium is based on a rate of 0.50%, which is a percentage of the lesser of the appraisal value, the purchase price or the maximum lending limit.
3 This example is based on the youngest borrower, who is 75 years old, a variable rate HECM loan with an initial interest rate of 3.305% (which consists of a Libor index rate of 0.680% and a margin of 2.625%). It is based on an appraised value of $280,000, origination charges of $4,800, a mortgage insurance premium of $7,000, other settlement costs of $2,688; amortized over 144 months, with total finance charges of $137,070.30 and an annual percentage rate of 5.30%. Interest rates may vary. The stated rate may change or not be available at the time of loan commitment or lock-in. Since the initial disbursement at closing is greater than 60% of the principal limit the mortgage insurance premium is based on a rate of 2.50%, which is a percentage of the lesser of the appraisal value, the purchase price or the maximum lending limit.
Author: Meredith Manz