Real Estate News
A home buying boon for baby boomers
Published Thursday, 16-Jul-2009 in issue 1125
The new, innovative FHA-insured Home Equity Conversion Mortgage (HECM) is the only reverse mortgage insured by the U.S. government, and it is the first reverse mortgage designed to facilitate purchases of homes for those who are ready to downsize their way into their golden years.
The mortgage was introduced at the end of 2008 to meet the needs of those worried about their finances as they approach retirement age, and the launch of the HECM was part of the Housing and Economic Recovery Act stimulus package. An HECM is an ideal choice for those with substantial home equity who want to sell and move, but do not want the burden of a new mortgage and years of future payments.
To understand the attraction of the HECM, it helps to understand how and why conventional reverse mortgages are used. The basic premise of a reverse mortgage is that the mortgage company pays the homeowner – not the other way around.
A typical reverse mortgage lets a homeowner convert a portion of the equity in their home into cash. But unlike a traditional home equity loan or second mortgage, no repayment is required until the borrower stops living in the home – which often means until death.
Traditional reverse mortgage products are sold by mortgage companies and banks, and to take out a reverse mortgage the homeowner must be at least 62 years old and be living in the home as their primary residence.
The goal of a reverse mortgage is to give the homeowner access to their home equity without having to actually sell their home or take out a second mortgage.
Because reverse mortgages are non-recourse loans, any loss of value between the time the mortgage starts and the time it ends must be incurred by the lender. So the homeowner or their heirs can never end up “upside down” in a reverse mortgage.
But many of today’s active seniors do want to sell and move. Downsizing is especially popular in this challenging economy, and that is impossible with an old-fashioned reverse mortgage – because it terminates as soon as the homeowner moves. So the flexible and adaptable HECM does something revolutionary. It allows seniors to sell their existing home and use the HECM reverse mortgage to pay for a new one.
To be eligible for the FHA HECM, the homeowner must 62 or older and own a home that has been fully paid for or has only a small mortgage balance. The proceeds from the HECM reverse mortgage are used to pay off any outstanding balance.
A homeowner with a house that holds lots of equity, for example, can sell their home, use the proceeds as the down payment on their new HECM-purchased home, and pocket any extra money they make.
They get a new house with no significant out-of-pocket expenses, access to cash that was tied up in their old home, and they never have to make a mortgage payment again, for life. Plus, the FHA HECM program finances homes worth as much as $625,500.
The HECM is a great option, for example, for those who want to move out of a larger family home and downsize to a condo. Homeowners typically save a large chunk of money by selling a more expensive property and buying a smaller and less costly one. Then they can invest the profits to help pay for retirement, or use them to pay off other outstanding debts. They also get to enjoy living in a new residence that requires less maintenance, upkeep, insurance and taxes.
Many environmentally conscious baby boomers, for example, are selling their bigger and older homes and buying more convenient ones with high-tech energy-saving features like solar electricity systems. These energy-efficient homes often come with extra perks – like green technology tax benefits – and that adds to the sustainable savings captured by the homeowner over time.
HECM homeowners must still pay real estate taxes, insurance and utilities, but they can never be foreclosed on or forced to vacate the premises due to missing a mortgage payment – because there is no mortgage payment. That offers extraordinary peace of mind and protection that many of today’s retirees seek in the wake of the recent foreclosure crisis.
The FHA insures these loans. To learn more, contact any FHA-certified lender, talk to their local realtor, or visit an HUD or FHA office.