THE LAST HOME WE WANT TO BUY
Mark Schumacher, NMLS ID 519754
Retirement Funding Solutions, a Mutual of Omaha Bank Company
With retirement looming or in full swing home buyers often have a different set of priorities for what makes a home desirable. Master on the main is nearly universal for this group of buyers. Low (or no) maintenance, convenient access to amenities, recreation, and healthcare – and of course close to the grandkids – top the “must have” list for buyers. On the financial side, No Monthly Mortgage Payment sounds great but is often in competition with More Retirement Reserves that so many mature adults want. Pay cash and give up more retirement reserves or go conventional financing to keep more reserves but have a mortgage payment in retirement. It’s good to know there is a 3rd option available to home buyers age 62 or greater to address both of these concerns.
HECM For Purchase (H4P) is an FHA loan for home buyers age 62 or greater that does not require any monthly mortgage payments be made. H4P makes it possible to purchase a primary residence with a one-time down payment of about 50-60% of the purchase price without having a mandatory monthly mortgage payment going forward.
The home buyer is keeping more money liquid for their retirement reserves and still not having the mandatory monthly mortgage payment. Instead of making a payment these buyers can opt to have the interest added to the loan balance, deferring the repayment of the loan until it is no longer their primary residence. Typically, this occurs due to death, sale of the home, or permanently moving out. The H4P option frees up cash the homeowner can use as they choose in retirement. Here’s some examples we’ve seen recently.
Paul & Maxine lost an elderly parent they had been caring for. When mom passed away they wanted to move closer to grandkids. They preferred to buy their next home, move in, and then sell their departure home. Doing so meant less stress on them and not worrying about the timing of the two transactions. They expected to net about $180,000 when they eventually sell their home. They understood that homes are more expensive where they are moving to compared to where they are moving from. They found a home they loved for $310,000. They made a one-time down payment of $180,000 which came from other assets they had, financed the rest using H4P, and now have no mandatory monthly mortgage payments. When they sold their departure home they replenished the $180,000 to their retirement reserves.
Frank & Brenda needed to downsize. They were approaching age 90 and the home they’d lived in the past 25 years was too much upkeep with the large yard. Though they had saved well for retirement, it had been 30 years since they stopped working and over that time (and several recessions) their savings were significantly depleted. They still had enough savings for a large down payment but paying 100% cash would have limited their purchase options too much. Selling their departure home first in order to use their equity for their one-time H4P down payment wasn’t viable because their home wasn’t ready to show and it would be difficult to make it ready prior to them moving out. And doing a double move at their age was a no-go. H4P fit very well by making it possible to easily make their necessary down payment, move in, then sell their departure home later. And by managing their loan balance going forward they can ensure a home for their kids to keep if they choose to.
H4P is designed for home buyers age 62 and greater. It is a liquidity tool to help preserve future cash flow needs. 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, homeowner’s 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 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 home purchase.