Vail Daily column: Never make a mortgage payment?
Death, taxes and (if you want to own a home) mortgage payments never seem to go away. But there might just be a way to get rid of your monthly mortgage payment without paying cash for your home.
Many people have heard of reverse mortgages, which traditionally are reserved for older homeowners (age 62 and older) to use the equity in their home to pay the mortgage off over their remaining years by accruing the interest due against the equity in the home, resulting in the elimination of monthly mortgage payments. In some cases, the borrower can also draw on their equity like a line of credit.
What few people know though is that a reverse mortgage can be used to purchase a home as well, and you never have to make a mortgage payment out of your own pocket. There are some limitations, but this FHA-sponsored program is very real and can work well for the right person.
The short version of how it works is the borrower would purchase a home putting between 30 and 50 percent down (the younger you are, the more you put down). FHA will then lend you the money for the balance of the purchase price and begin accruing the interest due against the equity in the home.
When the home is sold, or the borrower no longer lives in the property as their primary residence for longer than 12 months, then the loan and accrued interest become due. If the amount owed for principal and interest exceeds the sale proceeds, then the borrower or his estate is excused from the remaining liability.
If there is equity from the sale, then the borrower or his estate receive the proceeds after the loan and accrued interest are paid. The borrower retains full title to the home and can sell or refinance the home at any time and pay off the reverse mortgage without penalty if they so desire.
Some other general rules include that if it is a condo, then the project must be FHA approved, which rules out virtually all condos in Eagle County, although townhomes should be eligible.
The max loan amount varies with the age of the borrower but is generally in the mid to upper $300,000 range. The age eligibility is calculated by the younger of the couple. So if you’re a 70-year-old geezer with a trophy 29-year-old wife, good for you, but you won’t be eligible!
Let’s look at an example. If an individual is 67 years old and looking at a $500,000 home, then he would qualify for a max loan amount of $324,000, meaning he would bring $176,000 down payment. FHA does charge a onetime guarantee fee of 2 percent of the purchase price ($10,000) and monthly mortgage insurance of 1.2 percent of the loan amount. Other closing costs might total about $3,500. Depending on the starting rate chosen, the borrower could get a credit back to offset the $10,000.
The program does offer fixed and adjustable rates, with adjustable probably being the best deal right now, but the rate can adjust monthly. Currently, that rate would be about 2.6 percent plus the monthly mortgage insurance of 1.2 percent, which would make the rate about 3.8 percent. Bottom line is the interest and mortgage insurance cost is $972 per month.
So, our borrower moves into the house and lives there for 20 years and never makes a mortgage payment, although he does pay taxes and insurance. During that time, approximately $233,280 in interest and mortgage insurance racks up on top of the $324,000 principal, so he owes $557,280.
If the home only generates $550,000 after it is sold, then the borrower or his estate is forgiven the difference. If the property generates $750,000 after selling expenses, then the $557,280 is paid back and the owner or his heirs get the difference.
The other interesting feature is that this program assumes a minimal property appreciation, and a line of credit is created that the homeowner can draw off of, regardless of the properties real appreciation or not. If the borrower draws this money off and the property value is still less than owed, then there is no penalty to the borrower.
In the mean time, the borrower has been able to use his cash flow income for living expenses and preserved his other assets from being depleted. This can remove an enormous amount of uncertainty when planning for retirement and allow seniors to “age in place.”
This can also be a strategy for divorce settlements. One spouse might agree to give the ex the down payment required to get settled into a home with a reverse purchase money mortgage in and then there are no monthly house payments to work into the spousal support side of the equation.
Also, there is no income or credit qualification in most instances other than making sure there is some income to pay taxes, insurance and basic maintenance on the home.
Chris Neuswanger is a mortgage loan originator with Macro Financial Group in Avon and may be reached at 970-748-0342. He welcomes mortgage related inquiries from readers.