by Mark Schumacher, Home Equity Retirement Originator, Retirement Funding Solutions
In 2009, the US housing market was hurting. Home values were down and so were home sales. That same year a new program was introduced for home buyers in or nearing retirement age named Home Equity Conversion Mortgage For Purchase, or HECM For Purchase, or simply, H4P. Unfortunately, with the housing market in decline the awareness and knowledge of H4P was slow to take hold. But as the market has rebounded across the nation, and certainly here in the Upstate, H4P use is growing.
H4P is an FHA loan for home buyers age 62+ that allows them to buy their next primary residence with a one-time down payment of roughly half the purchase price and have no monthly mortgage payments going forward.
Traditional “cash buyers” have a new option. The appeal of H4P comes from retirees less interested in paying cash for their retirement home and more interested in having cash for their retirement living. No longer do they have to sink so much liquid cash into their home to avoid having a mortgage payment.
The recent housing recession has been a hard reminder that home values are not guaranteed to keep going up. This gives some retirees pause before committing so much of their retirement reserves to their illiquid house.
The H4P loan matures when the homeowner is no longer living in the home as their primary residence. At that point the home is sold and the loan is repaid from the sale proceeds and any remaining equity stays with the owner or estate. Also, if the heirs wish to keep the home they can do so by paying off the H4P, most likely from refinancing.
The downside of H4P is the debt that builds up on the house. The borrowed money (roughly half the purchase price) is accruing interest and mortgage insurance. This accrual comes from the equity in the home rather than cash flow since monthly payments are not required. What is required is that the homeowner stays current on property taxes, homeowner’s insurance, association dues if applicable, and upkeep of the home. The amount of equity remaining at the end is a factor of the interest rate, how long they live in the house, and the future value of the home.
FHA charges mortgage insurance because they are guaranteeing for the home buyers and their estates that even if the debt on the house is more than the home value when the loan matures, they are not responsible for any shortfall. In other words, the home will fully satisfy the debt or FHA will so no deficiency judgment goes to the estate.
Home buyers 62+ expecting or planning to have a mortgage payment might also qualify for H4P, thereby eliminating the mortgage payment in their retirement years. This can make those retirement years look considerably better and more secure. Some home buyers have enough assets to be cash buyers but don’t feel comfortable giving up that much of their retirement reserves and instead choose to have a mortgage payment. H4P could provide a happy medium allowing this buyer to avoid the mortgage payment while keeping reserves available. The key is having the roughly 50% onetime down payment.
Next time we’ll dive deeper into other potential benefits of H4P, such as the buying power it gives to comfortably own your dream retirement home, avoiding a contingency contract which is less appealing to a seller, and selling the departure residence after you’ve moved into your new home so you don’t have to deal with the showings.
Anyone 62 and greater that is not yet living in the home they want to enjoy in retirement should consider all their purchase options. Whether it’s achieving the lifestyle you’ve worked for or relaxing in the confidence of strengthened retirement liquidity H4P offers some compelling benefits. See our ad on the next page, contact us, and we’ll give you the “HECM For Purchase Buyers Guide”, a more thorough read about the H4P option.