When Ed and Sharon Taggart found themselves in a big two-story house after retirement, they made the decision that their next home would be their forever home.
It would be one level and have the amenities they needed as they grew older. The only hitch was that home prices in the area they wanted to live in were higher than expected.
“We were looking for a way to buy a one story home in a newer area of Oklahoma City without spending all our cash reserves,” said Taggart. “It had always been our belief that paying cash for a house made the most sense, but at this stage of our life we didn’t want to tie up all our money in a home or have a mortgage payment. We wanted to have some cash available for travel.”
The couple opted for an FHA home equity conversion mortgage (HECM) for purchase.
Only available to those 62 and older, this type of loan can be used to tap into equity in a current home or, like the Taggarts did, to purchase another one.
“It just made sense for us,” said Taggart. “We spent a fair amount of time getting educated, asking questions, weighing the options, and considering the long-term implications. Now we’re in the right house and actually enjoying home ownership again. I’m not sure why more of our friends aren’t doing it.”
I believe that the answer to Mr. Taggart’s question about why more people, particularly those who could really benefit, avoid the HECM is that they’re misinformed. They read articles or hear stories from friends and family and don’t do their own research.
It’s amazing how much misinformation there is about this option, even among real estate agents. Unfortunately, you really have to do your homework in order to get the full perspective on both pros and cons of the HECM.
Most of the attention given to HECM loans has been about using them to pay off an existing mortgage or to tap into current home equity.
Not as widely publicized are the ways in which it can be strategically used for financial and estate planning, including purchasing a more suitable house for aging in place.
There are different types of mortgage loan, so it’s not a one-size-fits-all situation. Some HECM loans are proprietary and backed by the companies offering them. There are also federally-insured loans backed by the U. S. Department of Housing and Urban Development (HUD).
Big financial decisions, especially relatively complex ones, require more time and consideration than most people take.
We typically refer people to lenders that we trust and who we know will educate people and then allow them to choose the best option rather than pushing them into a specific loan product.
Fairway Independent Mortgage Corporation is a nationally known company with loan officers like Lee Smith specializing in this type of loan. We also have Oklahoma City-based lenders, but it just depends on the client which loan officer we recommend.
The education process should come sooner and ideally it would be in person (zoom or person to person meeting) so people can ask questions and consult with trusted advisors.
We don’t, however, recommend calling an 800 number from television or radio commercials or clicking on ads on social media or other online services.
The Taggarts are a perfect example of people who made an informed decision and who planned in advance.
HECM for Purchase
The H4P, a type of HECM, is used especially for purchasing a new or different residence. People may utilize these loans for a variety of reasons, most notably the ones listed below.
• Build a new customized home
• Relocate closer to friends and family members
• Purchase a home in a 55+ community
• Downsize to a smaller, easier-to-maintain home
• Move into a newer home with modern amenities
How Much Can Be Borrowed
The amount you can borrow with a HECM or proprietary reverse mortgage depends on several factors, including:
• your age
• the type of reverse mortgage you select
• the appraised value of your home
• current interest rates
• your willingness and ability to pay property taxes and homeowner’s insurance
Family Matters
Ron was living in a 2 bedroom home with only one bathroom when found himself needing to provide a place for his granddaughters to live.
Having just retired and relying on a fixed income, he was concerned about buying another house that would require a mortgage payment. He turned to a HECM for purchase as a way to provide for his growing family.
“By having this type of financing with no monthly mortgage payment, I am able to use my money to provide a better life for my grandkids,” said Ron.
“Now the girls have their own rooms and I have a bathroom all to myself. It was the best possible scenario and I couldn’t have afforded to do it any other way.”
No More Stairs
Martha and Tom lived in a large two story home with bedrooms all located upstairs. Mobility challenges made navigating the stairs not only difficult, but also a safety concern.
Their kids mentioned the idea of using a HECM for purchase to buy a smaller home with less to manage as a solution to their dilemma.
“When our kids told us that we should move, I knew we would never be able to afford a home my wife would be happy with, said Tom. “By using part of the equity in our old house and a loan for the rest, we were able to buy a much nicer home than the one we moved out of. Happy wife, happy life.”
Mortgage Loan to Preserve Cash
Jerry and Cammy sold their longtime residence of over 40 years after the maintenance fees, taxes, and insurance had skyrocketed beyond their understanding. They no longer needed the big house and knew they would have a considerable return on their original investment of only $140,000.
“We lucked out. Our area has really grown and our home is now in one of the hottest areas around,” said Jerry. “That said, we are tired of the costs of keeping it up and we don’t need this much space anymore. The question for us was whether to use all the proceeds on a new home or to put some cash aside and invest it in other ways.”
Jerry and Cammy eventually sold their home for nearly $600,000 and bought a newer smaller place for $350,000, only using about $185,000 of their proceeds. The balance was financed using a HECM for purchase.
With an extra $400,000 plus in the bank, the couple established college funds of $100K each for their four young grandchildren.
“By the time the grandkids need the money, the funds will have enough in them to more than cover their education,” said Cammy. “It gives me peace of mind knowing that they won’t have to worry with student debt.”
If you or someone you know would like a complimentary downsizing coaching appointment, give us a call at 405.708.7010.
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