A reverse mortgage is a financial agreement in which a homeowner relinquishes equity in their home in exchange for regular payments, typically to supplement retirement income.
A reverse mortgage is against a primary residence, yet the loan also works to help purchase a second home.
While the proceeds of a reverse mortgage typically help seniors to “age in place” by making their home more comfortable for their retirement years, there are no limitations on how reverse funds can be used.
One family sought to lower their monthly mortgage payment on their primary home so that they could afford the monthly payments on a recreational cabin. Instead of cashing other assets, paying the capital gain tax and plunking down the net amount as the cabin’s down payment, the couple took out a reverse mortgage, which accomplished the same goal.
“They wanted to keep their home but were concerned that their monthly obligations would prohibit them from qualifying for another mortgage on a second home,” said John Harding of Axia Home Loans Reverse Mortgage Division. “By refinancing their home with a reverse mortgage, it not only eliminated their mortgage payment but also provided the down payment funds for the cabin. Since there was no longer any monthly payment, it was easier for them to qualify for a mortgage on the cabin.”
Let’s take a look at the numbers:
Mortgage payment: $2,114 (plus taxes and insurance)
Reverse Mortgage: $433,800
Net proceeds after paying off mortgage plus closing costs: $128,311
Purchase price: $215,000
Down payment: $70,000
Funds needed to close: $77,000
Conventional loan: $145,000
Mortgage payment: $811 a month (plus taxes and insurance)
The strategy will enable the Casey’s to live in their home with no mortgage payments for the rest of their lives, or until they sell the house. It also reduces their monthly mortgage obligations from $2,114 to $811.
A reverse mortgage is a loan that enables homeowners 62 or older to borrow against the equity in their home. They can do so without having to sell the home, give up title or take on new monthly mortgage payments. One uses loan proceeds for any purpose, they take out as a lump sum, pay fixed monthly payments, establish a line of credit, or have a combination of those options.
The “expected interest rate” is a critical factor that determines how much equity an elderly homeowner is eligible to receive from a HECM.
Add a margin to the 10-year U.S. Constant Maturity Treasury rate to calculate it, which is published weekly by the Federal Reserve.
The reverse mortgage loan amount depends on the borrower’s age, current interest rates. In most cases, so does the location of the home. A reverse mortgage does not have to be repaid until the borrower moves out of the home permanently, and the repayment amount cannot exceed the value of the home.
Seniors can “outlive” the value of their home without being forced to move. The homeowner cannot be displaced and forced to sell the home to pay off the mortgage. Even if the principal balance grows to exceed the value of the property, this is so. If the value of the house is exceeding what is owed at the time of homeowner’s death, the rest goes to the estate.
A controversial topic has been the “trailing spouse” issue.
If the surviving spouse is not included on the reverse note, the surviving non-borrower spouse may not be able to pay off the loan balance or qualify for a HECM on their own to remain in the property.
The situation usually occurs when an older man marries a younger woman. The woman then chooses not to go on the reverse mortgage title. Since the age of the younger spouse dictates potential proceeds, her participation decreases the net amount.
Recently, HUD’s Office of Housing Counseling sent a notice to all HECM-approved counselors. This encourages them to take special precautionary measures when meeting with non-borrower spouses. So, they fully understand the future repercussions of not being on title to the HECM loan. The notice also recommended that counselors get a signed, individual written statement from a non-borrower spouse. This must acknowledging that he or she may have to leave the property upon the death of the borrower.
This reality is additionally important when a second home is involved. A reverse mortgage can be terrific, but if your name isn’t on the mortgage note, at least have somewhere to stay.
By Tom Kelly
November 30, 2013