Vail Daily column: Reverse mortgages can be a solution for some
May 16, 2014
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 over) 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.
How It Works
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 six out of any 12 month period 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 received 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, the project must be FHA approved, which rules out virtually all condos in Eagle County, although townhomes should be eligible.
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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. If one spouse is too young, or the loan amount is reduced because of their younger age, that spouse can be left off the loan, but the huge problem here is that the loan will be called due when the borrower passes on, forcing the surviving spouse to sell or pay the loan off regardless of their ability or desire to do so.
Let's look at an example. If an individual is 67 years old and looking at a $500,000 home, 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 would accrue on top of the interest at 1.2 percent of the loan amount annually. Other closing costs might total about $3,500.
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 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 is 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. 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 a enormous amount of uncertainty when planning for retirement, and allow seniors to "age in place."
This can also be a strategy for divorce settlements involving older couples. 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. A cool feature of these loans is that if you are able to pay down a chunk of the principal (such as from life insurance a surviving spouse might receive) you can usually get a line of credit in an equal amount. This slows the rate interest is accruing on the unpaid balance while providing future access to the funds if needed. It's like a home equity line of credit you can tap.
Of course, if your home does not appreciate by the time it is finally sold, you might end up reducing the lenders losses by reducing the loan balance if you don't pull that money out in time. So if you wake up feeling really bad one morning, then you might want to write yourself a draw check and drop it at the bank on the way to the doctor.
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 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.