TYPES OF REVERSE MORTGAGES
The most common and only reverse mortgage insured by the U.S. Federal Government is called a Home Equity Conversion Mortgage (HECM).
Jumbo reverse mortgages are also available for homes with values greater than what HUD will insure but there are more restrictions since these are typically financed by individual lenders.
As a local broker we are setup to offer both the HECM and jumbo reverse mortgage programs. We will review all of the available programs to ensure you are getting the best deal for your specific financial goals.
Purchase vs Refinance
Using a Reverse Mortgage to Purchase a Home
Did you know that you can use a reverse mortgage to buy a home? It is a great financial tool that keeps more money in your pocket, boosts your buying power, and allows you to avoid having a mortgage payment. Just like a refinance transaction, you can access a certain amount of equity based on your age, the interest rate, and value of the home. The amount that you are able to access becomes your initial loan amount and you put down the difference.
For example, say you are able to access 60% of a homes value based on your age and the interest rate and are buying a home for $200,000. $120,000 (60%) is financed through the reverse mortgage, you put down the difference ($80,000), and you still avoid a mortgage payment for the rest of your life.
Say you were moving to Arizona and sold your home in Illinois that you owned free and clear for $300,000 and still able to access 60% based on your age and rate (like the example above). Instead of putting $200,000 down to buy the home cash leaving you with $100,000 in your pocket from the proceeds of the sale of the previous home, a reverse mortgage would allow you to only have to put $80,000 down (40%) keeping $220,000 in your pocket from the proceeds of the sale of the home and you still avoid having a mortgage payment.
It can also boost your buying power. If you had $300,000 in proceeds from the sale of a home and were comfortable with putting $200,000 down like the example above, instead of buying a home cash for $200,000 you could use a reverse mortgage to to buy a $500,000 home and still have no mortgage payment. $300,000 or 60% financed through the reverse mortgage and the $200,000 down.
Reverse Mortgage for Refinance
This is what comes to mind for most of us when we think about reverse mortgages. Accessing a portion of your existing home's equity with no mortgage payment for life. The amount of equity you can access will depend on three things: the age of the youngest borrower (or eligible non borrowing spouse), the interest rate, and the appraised value of the home.
An eligible non borrowing spouse refers to a spouse under the age of 62 living in the home. There have been added protections for eligible non borrowing spouses allowing them to continue to live in the home with no mortgage payment for the rest of their lives but won't have access to any of the monthly payments or funds set aside by the borrower should the borrower pass. Once an eligible non borrowing spouse turns 62 they can be added to the mortgage through a refinance in order to have access the funds.
How you access the funds varies depending on whether you decide to go with fixed rate program or adjustable rate mortgage.
Fixed Rate Vs Adjustable Rate
There are more options for adjustable interest rate mortgages, you can elect one of the payment options or a combination of the options:
Cash at close - elect to take a portion, all, or none of the proceeds at closing
Tenure - equal monthly payments as long as at least one borrower lives and continues to occupy the property as a principal residence.
Term - equal monthly payments for a fixed period of months selected.
Line of Credit - unscheduled payments or in installments, at times and in an amount of your choosing until the line of credit is exhausted.
**Money set aside on a line of credit has a growth rate of 1.5% greater than the interest rate. This is one reason why a reverse mortgage can be such a powerful tool for retirement planning and why many financial planning experts are recommending them for clients who even own their home free and clear and are comfortable with their finances. It provides a growing nest egg they can access in the future, if and when they need, and protects that equity from volatile housing markets.
Say you own a home worth $300,000 that is free and clear are able to access 60% of the value based on your age and a 5% interest rate. With no mortgage to payoff you could put all of the reverse mortgage proceeds onto the line of credit which is growing at 6.5% annually (1.5% greater than the interest rate). Wait, what!? Yes, that means you are accruing 5% interest on essentially nothing since interest only accrues on what you borrower but $180,000 is growing annually at 6.5%! If the housing market crashed that equity is protected, not to mention, growing at an extraordinary rate.
For fixed interest rate mortgages, you will receive the Single Disbursement Lump Sum payment plan.
Fixed rate mortgages are more common for purchase transactions and refinance transactions with larger existing loan amounts since you are maximizing the amount of money you are using through the reverse mortgage in order to minimize the amount of money you need to cover out of pocket to either buy a home or eliminate payoff and existing mortgage. In these scenarios there is no equity left over to setup monthly payments or put on a line of credit and comes with the peace of mind knowing the interest rate won't adjust.