How to use a Home Equity Conversion Mortgage (HECM) to supplement your Retirement or Retire Early!
With the high cost of housing and minimal retirement compensation many retirees put off retirement and take full or part time jobs to bridge the gap for the cost of housing and the income they are able to generate.
If you own your home and have responsibly paid down the mortgage a Home Equity Conversion Refinance (MECM) or downsize Purchase might be the right loan for you. This program requires you have roughly 50-60% equity for a Refinance or a 50-60% down payment for a Purchase. Many retirees have been turned down because they don’t have enough equity to qualify for these highly desired programs, however, we have been able to help countless families take the equity they do have in their larger homes and use that equity toward the down payment requirement for a downsized living space more suited with their current lifestyle.
How does it work…
Let's use the example of a retired couple living in an 1,800 square foot home with 4 bedrooms, 3 bathrooms and a good size yard. The average home has a $300,000 mortgage, $450,000 home value, and an unaffordable $2,500 a month payment. You’ve determined that you only need 2/3 bedrooms and 2 bathrooms now that you’re retired. We’ll help you sell that burdensomely large home and mortgage, find a smaller and cheaper home in the $300,000 range. We can find something locally or a more affordable market (with all the upgrades already done), transfer the $150,000 profit as equity down on your brand new HECM with no payments for the rest of your life.
The $2,500 you were spending on housing is now available for you to spend monthly, take a vacation, help someone in your family or do anything you want. You no longer have to work full or part time, spend your free time maintaining such a large home and you can enjoy your retirement. The only obligation you will have is to pay your property tax, home owners insurance and HOA fees (if you have any) and enjoy your retirement like you worked so hard to.
Whats the catch?
Many retirees think there is a catch, “you can’t get something for nothing” or “who is going to pay my mortgage anyway, right?” Well actually its not free and you pay your own mortgage but its structured in a way that helps your cashflow through retirement. You see, the payments come from the equity in your home, you don’t have to make a payment from the monthly retirement income like now, rather, your unpaid loan balance collects interest at an average rate of roughly 5% per year and gets placed on top of your original unpaid balance. You only accrue interest based on the original balance never on the accrued interest so let's take a look at how that works.
$150,000 Original balance on new downsized home
$ 7,500 Annual interest at 5%
$300,000 Total amount you would owe (principal and accrued interest) after 20 years
Remember you bought the home for $300,000 originally and that’s why the lender requires you have at least 50-60% equity (depending on your age). This allows for the lender to use the remaining equity to secure the accrued interest (monthly interest payments) when it time to pass on your estate. You were able to use the equity in your home to avoid a high and unaffordable housing payment while getting to enjoy your retirement. You have used the equity in your home like a pre-planned savings account that allowed you to gain back that $2,500 a month you would have had to spend on housing. Even if you live to be 110 years old you’ll never have to make a payment! We like to also remind you that you are not required to accrue the interest, you can actually send in monthly, quarterly or annual interest payments to reduce the amount of interest your loan is accruing. If you choose this option you can use the loan as a flexible spending option to skip payments during the year when unexpected expenses pop up. This strategy helps you preserve even more equity in your home and allows you to use the equity to manage your monthly expenses.
What about my kids, they won’t get anything from my estate!
Many families are concerned with interest accruing there won’t be anything left over for the kids. But wait, don’t forgot to account for annual appreciation! Thats the winner in this scenario. You are paying a rate of roughly 5% in interest annually on the $150,000 loan amount but your home is accruing value at a modest 3.5% annually on the original $300,000 purchase price. Your home should be worth $600,000 at the end of that same 20 years. The good news is this…. If your housing payment is becoming to unaffordable or preventing you from retiring you run the risk of losing the home and all the equity that comes along with it or you may be forced to sell and rent never having the ability to pass on the extra money appreciated on to your children. Remember you started with $150,000 when you sold your big home and by using the Home Equity Conversion Mortgage you were able to supplement your retirement by eliminating a housing payment and still build nearly $300,000 in equity to pass along to your children. You can even use all or a portion of the $2,500 a month you are saving to invest and build even more wealth to pass on to you estate! Neither the government or the bank takes your home. Your heirs get 6 months to finance the property into their names or sell the property. If they can’t accomplish either after 6 months the lender will work with them and grant another 6 month extension. As long as your heirs work with professional Attorneys or Real Estate Firms like HomeStart, this shouldn’t be a problem.
How do I learn more, Qualify or Get Started?
This loan is very simple to qualify for, Credit isn’t a consideration other than if a reserve account needs to be set aside to pay tax and insurance. This loan is intended for those who may be struggling so don’t worry about credit. This loan is also structured to assist those who don’t make a lot of money so don’t worry about that either. Remember this loan is intended for those who are struggling in those areas so qualifying is easy. Simply give us a call to discuss how to qualify for a HECM refinance or Downsize Purchase with HECM financing and we will walk you through the process. We can handle every aspect of the transaction under one roof making it easy with only one point of contact. It's never to early or to late to look into the benefits of this program so give us a call today to see how we can help.
Director of Business Development
HomeStart Realty and Loans