Understanding Senior Financing Options

Issue 13.17

Many people are aware that a home can be purchased using a Home Equity Conversion Mortgage, also known as HECM loan or senior financing.  But most people don’t realize that there are actually four types of HECM loans.

In all four loan types, the loan amount is determined by the home’s value and the age of the youngest borrower.  At age 62 the maximum loan amount is 52.4% of the appraised value of the home.  At age 90, maximum is 75%.

With the exception of the HECM Line of Credit, once the loan is established, the loan amount cannot be increased.

Now let’s talk about specific loan types

HECM for Purchase – A HECM for purchase loan allows buyers to purchase a home by borrowing the maximum loan amount and paying cash for the difference.  Since all of the loan proceeds are disbursed to the seller at closing, the buyer receives no cash back.

HECM TERM LOAN – A HECM term loan allows borrowers to receive a fixed monthly payment for a defined period of time.  Borrowers can decide payment amount and the number of monthly payments as long as the total of all payments does not exceed the maximum loan amount.  The lender also pays the borrower 1.25% interest on the undisbursed loan funds (That’s probably better than many banks are paying on deposit funds.)

HECM TENURE LOAN – A HECM is similar to a term loan in that it allows borrowers to receive a fixed monthly payment, but for this loan type the payments continue for as long as one of the borrowers lives in the home.    The payment amount is not determined by the borrower, but is a function of the borrower’s age and the home’s value.  Unlike social security payments, the payment amount doesn’t change if one of the two borrowers dies or no longer lives in the home.  Payments to borrowers continue as long as the last surviving spouse lives in the home, regardless of their age.  These payments are NOT limited to the maximum loan amount.  As in the term loan, the lender pays 1.25% interest on undisbursed funds to the borrower.

HECM LINE OF CREDIT – A HECM line of credit is the most flexible of all HECM loan types.  It allows the borrowers to determine the timing and the amount of withdrawals from the undisbursed loan funds up to the maximum loan amount.  Even better, the maximum loan balance can increase by the amount of the amount of the interest rate on the loan (currently ranging between 4.5% and 5.06%) plus the annual PMI (1.25%)

Although borrowers don’t make mortgage payments, HECM or senior financing loans are a mortgage and must eventually be repaid by selling or refinancing the home.  There are several other significant aspects to these loans that I will discuss in future articles.  To see of one of these products is right for your situation; call me today at 435-669-0009.  Veritas Funding (NMLS#252108) is an Equal Housing Lender.  This is not an offer of credit or commitment to lend. Loans are subject to buyer/property qualification.

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