The HECM for purchase program was institued to keep people from having to do an additional transaction in conjunction with the purchase of their home.
The ability to reduce the downpayment or stretch the available dollars to purchase a new home helps create more cash flow in the household. A home without a monthly payment (still responsible for taxes and insurance and still own the home) frees up cash for other areas of retirement and funds not invested in paying "all cash" can be invested in your retirement account for future retirement planning.
We have two approaches when working with our clients on the HECM for purchase.
1) The "First Resort" Home Loan. This Low utilization HECM loan is a great tool because it creates a credit line at the time of closing that grows at a rate equal to the interest rate. The funds available on the line will be slighly less than the initial investment in the house 15 years later in the example shown in our video @ www.h4p.info.
Advantages of the "First Resort" Home Loan include:
A) Lower closing costs than a full draw HECM loan at closing
B) Frees up more capital to invest in future retirement needs. Typically funds used to buy a house when downsizing are the proceeds from the sale of the previous home.If you do the "First Resort" home loan then it will reduce the initial investment and allow you to take what is some of the "tax free" proceeds from that sale and invest in other retirement accounts that are more liquid and can grow.
C) The Credit Line previously refernced are available after the first year and can be used in a lot of ways to improve the overall retirement. Funds left on the line will "grow" until needed. Coupled with the additional funds that were invested it creates a strong cash available position later in retirement when people traditionally think about drawing from Home Equity.
2) A traditional HECM, typically referred to as a "Full Draw" becasue all the funds are taken at closing. The reduced down payment of the HECM loan gives more buying power and frees up retirement cash flow.
Advantages of "traditional" HECM include:
A) Buy more house for the money. What if you couldn't find everything you wanted for the price you were looking for? We've had clients who were able to stretch their purchasing dollar by getting a HECM loan. Then typically they have money left over which is a nice thing, too.
B) Preserve Retirement Assets! The HECM Loan is at least 52.4% (62 years old) so if you only need about 1/2 down the rest of the money can either be invested in retirement or used ot buy "extras" when building a "new home."
C) Eliminate the tax liability of drawing funds from a retirement account to purchase a home. For example, someone will create income during the year they draw out the funds. This income is taxable in most cases. So if someone pulled out $100,000.00 for a new purchase this pushed the income up to a higher tax bracket and caused a potential IRS bill of $34,000.00. That year, it is likely the person who did this had draw money to pay the $34,000.00 in taxes and this contiues until the income is normalized.
Either way it is put together, there are fixed rate and ARM products that do not require a payment but you are allowed to make one if you like. The difference is the Fixed won't let you draw funds out again but an ARM will.
There are a lot of unique nuances to the HECM program that we at American Fidelity Mortgage Services Inc. can show/teach you. Used properly, the HECM program can be the best financial decision you can make to purchase a home.