by Mark Schumacher, NMLS ID 519754; Retirement Funding Solutions
HECM For Purchase (H4P) is an FHA loan for home-buyers age 62 or greater. H4P makes it possible to purchase a primary residence with a one-time down payment of about half the purchase price without having a mandatory monthly mortgage payment going forward.
Instead of making a monthly mortgage payment these homeowners can choose to allow the interest to be added to the loan balance. Doing so causes the loan balance to grow instead of the gradual decline in loan balance experienced by those making payments with conventional mortgages. Doing so also frees up cash for the homeowner they can use as they choose in retirement. Here’s some examples we’ve seen recently.
Frank & Stacey had lived in their home 16 years. They liked it but their master bedroom was upstairs. The stairs weren’t a problem at the time but they knew the day would soon come when they would absolutely not want to climb stairs every day. They found a new low-maintenance community being built that fit their desires beautifully. With the builder’s help they designed a ranch home with very nice finishes and a kitchen the way they wanted it. The final price tag came to 370,000 which was significantly higher than their existing home. Since they’re retired they were adamant about not having a mortgage payment, but paying cash would have required them to pull 230,000 from their retirement reserves. Instead, they decided H4P was their best option. They sold their home for 210,000 and after the mortgage payoff and selling fees they netted 140,000. With H4P they needed to bring 183,000 as their 1-time down-payment, so in addition to the 140k from their house sale they took another 43k from their savings, which they felt comfortable doing. The H4P loan covered the rest. Now they are in their new home that suits their lifestyle without a monthly mortgage payment – and without the exterior maintenance hassles they used to have.
Gary & Kathy wanted to move out of the cold weather and high property taxes of the north, so they came to South Carolina. Before they had heard about H4P Gary wanted to pay cash for their next home so they wouldn’t have a mortgage payment, but Kathy wanted to do conventional financing putting just 20% down and financing 80% in order to hang on to more retirement reserves. They purchased a home for 240,000. They easily netted enough from the sale of their old home to pay cash for the new home but they decided not to. For them, H4P offered a comfortable middle ground…they could avoid a monthly mortgage payment and still add significant reserves for retirement. They needed to put down just 107,000 to buy their home, they kept an extra 130,000 liquid to access in retirement, and they have no monthly mortgage payment that would have hurt their cash flow.
H4P is designed for home-buyers age 62 and greater that are looking for the last home they want to buy. It is a liquidity tool. It creates cash reserves that can be used to support homeowners in their retirement years from an asset that is generally illiquid or even drains liquidity via mandatory monthly mortgage payments. It’s not free money. It is a loan, and like every other home loan it has interest. It’s the option to defer the payback of interest and principal that makes it helpful to cash-flow in a stage of life where cash-flow is typically most challenged – retirement. This loan matures once neither homeowner lives in the home anymore as their primary residence. Homeowners are responsible for paying property taxes, homeowners insurance, homeowners association fees if applicable, and home maintenance. FHA made changes to H4P in the Fall of 2017 which, among other things, lowers the back-end cost of the loan, i.e. when it’s paid back.
To get more information the H4P Buyer’s Guide magazine is available by calling Mark at 864.906.2296. Understand the cost, understand the benefit, and see if H4P is the best option for your last home purchase.