Vail Daily column: Reverse mortgages can work for purchase or refinance
While I have written about reverse mortgages a few times in the last year, I thought I would touch on the subject again as it seems to be a popular topic recently.
It has often been said getting a mortgage is the most complex financial decision most people make in their lives. Actually a reverse mortgage is in many ways even a more complex decision, but one that can be hugely beneficial to many older Americans (at least one spouse must be over 62 to qualify).
A reverse mortgage is a financial tool that can be used to either purchase or refinance a home. If you own a home, then you may be able to use this unique program to pay off your current mortgage and, if you have enough equity, then you can either get a lump sum cash out or a line of credit to draw on over the years. You might also be able to set up regular monthly payments for as long as you live in the home, or a combination of all three.
How it Works
Basically how it works is you take out a new mortgage loan, which will pay off your current loan (if you have one) and the lender determines a reserve margin of equity in your home to absorb accrued interest over your projected life span using actuarial tables.
On a refinance, let’s say you have a home valued at $400,000 and you owe $100,000 on it and you and your mate are both 70 years old. You could get a reverse mortgage for about $224,000 of which the first $100,000 would go toward paying off the old mortgage. If you got an adjustable rate option, then you could have a line of credit for the balance of the loan ( about $124,000).
The interest would start accruing on the $100,000 right away. Interest would accrue on whatever you draw against the line of credit. You never have to make a payment on the loan, the interest just accrues as long as you live in the home as your primary residence and are not absent for longer than 12 months (meaning for example that if you were hospitalized or in a nursing home for longer than 12 months the loan would be due). If you live in the house until you pass away, then the house will be sold by your heirs and if there is equity left in the home it will go to your estate. If there is no equity, then the heirs just sign the place over to the bank and the bank deals with disposing of it. You retain full ownership of your home always, and if the loan balance exceeds the value of the home there is no liability on behalf of you or your heirs to pay it back.
Keep Up with Your Bills
Keep in mind though that you do have to pay taxes and insurance and maintain the home. If you failed to do that, then you could be deemed to be in default and the home could be sold to satisfy the debt.
Few people realize that a reverse mortgage can be used to purchase a home as well. In this case, the buyer would make a substantial down payment (usually 40-50 percent of the purchase price) and could then live in the home for the rest of their life and never make a mortgage payment. The interest would accrue, and when the home was sold if there was equity the homeowner or his estate would receive the proceeds. If there was no equity, then the homeowner or his estate will just walk away from the property.
There are many facets to be carefully considered when deciding if a reverse mortgage is right for you or not, and quite honestly for some homeowners it would not be the right choice but for others it can be a life enhancing transaction. It can preserve liquidity and open many options for many senior citizens and ease concerns about outliving your money. It can also help homeowners stay in their homes years longer. A reverse mortgage used for a purchase transaction can also be a strategy for couples divorcing in that it could allow a spouse with cash but reduced cash flow income to own a 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.mtn mortgageguy.com.