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