Vail Daily column: Increased loan limits and property values help reverse mortgage options
January 13, 2017
As Eagle Counties population ages, more people are looking at a reverse mortgage as part of their retirement financial planning. While not for everyone, a reverse mortgage can be a valuable tool for many.
The way a reverse mortgage works is that, first, you must be at least 62 years of age. You must also have a substantial amount of equity in your home (at least 60-70 percent is the minimum) and if you owe money on your home the loan amount must be below the mid $300,000 range. Increasing property values have certainly expanded the number of homeowners who are eligible and the loan limits have increased slightly this year.
If you meet the above, it might be possible to qualify for a reverse home loan The limits and amounts available also depend on the above factors as well as your property type and current interest rates. Condos in Eagle County are generally not eligible as the project must be FHA approved and few are.
In addition, you must show the ability to financially maintain your home, and be able to pay your taxes and insurance on your own. This requirement can be met with a combination of liquid assets, income and in some cases, setting aside a portion of the loan proceeds in an escrow account. Generally, the older you are the more you can borrow.
The mechanics of a reverse loan are that if you qualify, the new reverse mortgage will pay off your existing loan and you have no more monthly principal or interest payments for as long as you live in the home as your primary residence and do not default on any terms of the loan (which include paying your taxes, insurance and maintaining the home in habitable condition, and a few others). You retain ownership of your home and interest accrues on the loan but is not due and payable until you either pass on or you sell the home. If you have enough equity, you might qualify for a lump sum cash out amount, or a line of credit to draw on over the years.
So let's look at an example. Assume you are 70 years old, and own a home worth $650,000 with an outstanding mortgage balance of $300,000. You would qualify for a payoff of the 1st mortgage and if you elected to go with an adjustable rate you would get a line of credit for approximately $41,000. The available amount on the line of credit will actually grow slightly each year. You would also have the option of a set monthly payment to help with living expenses of $468 for 10 years in lieu of the line of credit.
If you elected a fixed rate you could not get a line of credit but would rather have to take out a lump sum of approximately $36,000.
At such point you either no longer live in the home, or you have passed the home can be sold by you or your heirs and the original loan amount and any other disbursements and the accrued interest will be due and payable. Whatever equity is left in the home goes directly to you or your estate at the closing table. If there is no equity, the remaining balance is forgiven. In addition, in the event you pass while still owning the home and your heirs have a sentimental attachment to the old family homestead, they can purchase the property for 95 percent of the appraised value and any excess owed is written off.
One important thing to remember is that its generally best if both husband and wife are on the reverse mortgage. Eligibility and loan limits though are determined by the age of the youngest borrower. In the event that a reverse mortgage was taken out in the name of the oldest borrower only and that spouse passed the surviving spouse would likely have to pay off the loan to stay in the home. This could create a very real hardship for the survivor.
Reverse mortgages are complex transactions, and borrowers are required to take a short class from an approved counselor before applying. In addition, a good long discussion with a knowledgeable loan originator is helpful as there are different options in terms of closing costs and rates. Not all reverse loans have the same closing costs, and can vary by several thousand dollars. Reverse mortgages can also be used for a purchase transaction.
Chris Neuswanger is a loan originator at Macro Financial Group in Avon and may be reached at 970-748-0342. He welcomes mortgage related inquiries from readers. His blog and a collection of his columns may be found at http://www.mtnmortgageguy.com.