How HECM for Purchase Vanquishes Retirement Myths
The word is onThe Street: There are some retirement myths that no senior should fall prey to — and while some seem obvious, others bear explication. According to The Street’s investment experts, the 5 Myths are:
1) One million dollars equals a secure retirement. (Not necessarily: it depends on a number of variables, such as a senior’s debt, spending, and portfolio return.)
2) Health care will be the largest retirement expense. (No: it’s taxes.)
3) Downsizing will save retirees money.
4) It’s smart to pay off your mortgage early.
5) Medicare will cover all health care costs. (No: catastrophic only. That’s why buying supplemental insurance is a smart idea.)
Clearly, the key points for reverse mortgage professionals are #3 and #4. So let’s see what these financial experts have to say:
Downsizing: Retirees may move into a smaller home, but spend the money they save in mortgage payments on remodeling, a new car, a vacation, or other expense. Simply trading a large house for a smaller one doesn’t translate into savings.
Mortgage: If a retiree takes a chunk from their investment portfolio to retire their mortgage, it means they’ve lost that sizable sum — and potential future interest — for the rest of their life.
This is where a HECM for Purchase can be a boon. As you’re aware, the HECM for Purchase is a Federal Housing Administration (FHA) insured home loan that enables seniors 62 and older to use the equity from the sale of their principal residence, plus the HECM for purchase, to buy their next primary home in a single transaction.
A HECM for purchase allows seniors to right-size into a smaller home that may be:
- Closer to friends or family
- In an area with a lower cost of living
- Located in a community that better serves their evolving needs, such as senior co-housing, multigenerational dwellings, or even themed communities.
Presto: The right home for this stage of their lives, with zero mortgage payments.
So, to whatever terms you’ve previously used to describe a HECM for Purchase to your senior clients, you can now add “myth buster”. And perhaps it would be wise to suggest they also address Myth #5, and consider putting some of the money they save towards supplemental health insurance. Because as they prepare to purchase the retirement home of their dreams, planning for later life health needs just makes good sense.
10 Comments
H4P (HECM for Purchase) is perhaps less about vanquishing myths, and more about creating a Quality LifeStyle in Retirement that may have been elusive or otherwise thought unattainable by the current crop of Baby Boomers.
“Retirement Alchemy” – Creating a quality in Semi-Retirement (most Boomers aren’t ready to stop ALL work) whereby Active Adults can leverage and transform current assets (proceeds from Sale of their Homestead) into a highly leveraged acquisition in a 55+ Community (H4P) that is devoid of the maintenance (cutting grass, shoveling snow, cleaning gutters) creating a higher “Quality of Life” that is further enhanced by intrinsic Loan Features that most overlook like; 1) Upside-Down Proof, 2) Short Sale Proof, 3) Equity Protection in a Down Market (up to 70%), and Payment Flexibility (0 to All on a Monthly basis), with no pre-payment penalties.
90% of the Oldest Boomers (born 1946-1952) are homeowners and 2/3 have full Equity in their homes. Studies show that they are resolved to STAY where they are because they do not know that they have any other options. It is our job as an industry to position H4P in the context of a Retirement Income and Asset Planning Strategy.
“Right Sizing” can offer significant advantages. In the “Green Retirement” that I outline in my upcoming book (Killing Tiki), there are 3 Key components in designing a favorable Semi-Retirement Baby Boomer situation; 1)Comfortable and Efficient Living Arrangements. 2) Productive and Nurturing Lifestyle. 3)Financial Certainty.
Some Eye-Candy to underscore those Value-laden points. https://vimeo.com/47013428 . H4P is a very different business. Get Ready. Bill Thomas willetthomas@ymail.com
Dear Amara,
The HECM for purchase, H4P, is a great way to preserve your portfolio. The myths you list from advisors are just that and we at Security 1 Lending believe that many financial advisors and professionals concur. Jan 9th, 2013 a WSJ article showed that a widower bought a home after using some of his savings to care for his wife. His advisor said sell portfolio stock to buy up but the client said no, I will not burden my kids financially by depleting my own portfolio. He sold in Sacramento and moved to the Bay area without touching the stocks under management. As you said, sell your current home, use that cash as the down and closing on the new location and then live there without a mortgage payment.
Three things happen; 1.the homeowner improves his situation(in this instance he moved closer to the kids),2. the advisor keeps making fees on the preserved portfolio, while keeping it intact for distribution for 30 plus years, and 3. The Realtors got two sides of transactions, one buy side, one sell side.
Stimulate the tight RE inventory market by making a standard listing available for sale and then buy with quick and solid approval and loan commitment from the number one H 4 P company out there, Security 1 Lending and our servicer/partner RMS a Ginnie MAE MBS seller.
Bill Evans
NMLS 255463
Bill,
I LOVE “Retirement Alchemy”! Thanks for this wealth of additional information. I’m sure everyone who reads the blog will look forward to your book.
Warmly,
Amara
Bill (Evans) ~
This must be “Bill” day 🙂 Thanks for your insightful comment as well. You and Bill Thomas make a powerful case for why H4P is the alternative of choice for smart retirees.
Thanks for reading, and for taking the time and effort to share your thoughts to benefit others.
Warm regards,
Amara
The H4P prospect in my experience, have been folks who have an existing Reverse Mortgage on their home, believe in the program, and want to take whats left and plunk it down on their final nest.
I feel when working with there clients, my experience has been, you must do due diligence and help the client understand the challenges. Do they own multiple properties? Is their prospective Home (Community, Condo, or PUD, FHA approved?
Sellers particularly in a hot market want 30 day escrows. This is near impossible, although I did one, and the client should know these take about 45 days.
Naturally the H4P is a winner for the Senior and the Lender, but I feel you deal with the bad news first. Of course the financial issues mentioned by Amanda and my esteemed collegues are incredible, the reality is we need to get all the bad news out of the way, before we deal with Sellers, their Realtors, the pressure of an Escrow deadline etc.
Gregory B. Shearer
The Senior Equity Group
La Canaada, CA.
Hi Greg,
Thanks for emphasizing the importance of due diligence. As we’ve covered in previous posts, it’s essential to help your clients understand the complete picture of what a H4P or other reverse mortgage products entail.
Warmly,
Amara
H4P is a wonderful way to renew realtor relationships that have been cut because of the fear that RMs cost them listings.
With fewer than 200 monthly endorsements since inception, all of this praise seems greatly undeserved. Some have claimed that the ideal business model for H4P was with fixed rate Standards. This segment of HECMs had a fixed rate Standard origination rate of over 90% in the 30 months ended January 31, 2013. That is ridiculous.
The expectation is that originations will turn from fixed rate Standards to fixed rate Savers with a higher percentage of ARM Standards than in the last few years.
When asked about why the high percentage of fixed rate Standards in the past, the answers go from the ridiculous to the inane with many literally making no sense at all.
We all know that some seniors need every dollar they can find just to close the deal. But many have sufficient cash without the HECM in order to close the deal. So why get more cash than is needed with a fixed rate Standard and have interest and MIP accrue on it unless a significant portion of that cash will be consumed in a pending transaction? Why not use an ARM where the monies can be held in a LOC and grow with no interest growing on the unused funds?
What is clear is that the justification in someway will change but be certain the underlying reasoning will not substantially improve.
Brett,
Thanks for reading and taking the time to share your thoughts. Renewing business relationships is always a smart move.
Hi The_Cynic,
As usual, you provide the voice of balance. Thanks for your wealth of knowledge and for sharing it on this public forum so others may benefit.