This article contributed by guest blogger: Jim Vogel – Elder Action
The decision to purchase a home in your golden years is an exciting experience. But for some seniors, the experience can be downright daunting, and can even lead to unhealthy means of dealing with the stress of it all. But don’t worry – this doesn’t have to happen to you!
While the experience can certainly be emotional, there is at least one part of it that doesn’t have to keep you up at night: the financial aspect. There are a variety of options and avenues to consider when deciding how to acquire the necessary finances to buy your dream home, but one option in particular is designed specifically for seniors – the Home Equity Conversion Mortgage (HECM) for Purchase.
What is HECM for Purchase?
HECM for Purchase was introduced in 2008 by the Federal Housing Administration (FHA) to enable seniors 62 and older to purchase a home and obtain a reverse mortgage with a single transaction. According to the US Department of Housing and Urban Development (HUD), the program was designed to “enable senior homeowners to relocate to other geographical areas to be closer to family members or downsize to homes that meet their physical needs, i.e., handrails, one level properties, ramps, wider doorways, etc.”
According to the American Advisors Group (AAG), with an HECM, the borrower provides a down payment using built-up savings or the sale of a previous home. The equity acquired through the down payment and the new home’s value is then used to calculate the reverse mortgage loan amount, which will “cover the remaining cost of the home, just like with a traditional mortgage.” To avoid defaulting on the loan, you must continue paying your typical costs, such as property taxes, homeowner’s insurance, and homeowner’s association fees should you live in an area or neighborhood that requires them.
What are the Benefits and Disadvantages?
The HECM provides you with a reverse mortgage that covers the cost of your house, but what are the benefits and disadvantages associated with this type of mortgage?
According to The Huffington Post, reverse mortgages generally don’t impact Social Security or Medicare payments,and proceeds are generally tax-free. A reverse mortgage can serve as a source of income to pay off debts or unexpected expenses, as borrowers can often select that the loan amount be paid in either a lump sum or regular payments. Keep in mind that you won’t owe more than the home is worth since most reverse mortgages have a nonrecourse clause that prevents you or your estate from owing more than the value of the home when the loan becomes due.
It is important to take into consideration some of the disadvantages of a reverse mortgage, such as expensive application fees and closing costs that reverse mortgage lenders charge, thus adding up to several percentage points on your home’s value. MLS Reverse Mortgage states that most reverse mortgages use a variable rate, and mortgage debt increases quickly since you aren’t required to make payments while living in the home and interest is being tacked on. In addition, you or any heirs you may have won’t get to keep the house unless you repay the loan, and if you decide to move out for any reason, the loan’s payment will be due in full.
HECM for Purchase Requires Counseling Session
If HECM for Purchase seems a little bit confusing, rest easy in the fact that counseling is must before acquiring it. According to the HUD, housing counseling is required before the borrower incurs any costs for the loan. Counseling can be done face-to-face or by telephone, and all HECM counselors are required to “adhere to all FHA’s guidelines regarding information that must be provided and must tailor the session to address the unique financial circumstances of the household.”
Ask your lender for a list of HECM counselors, and be sure to ask what the counseling fee will be before attending the session. HECM counselors are there to not only help you understand what HECM is, but if it is the right option for you in purchasing your home.