By Mark Schmidt
It’s hard not to hear about reverse mortgages these days with celebrity endorsers like Robert Wagner, Pat Boone, James Garner and, most recently, Henry Winkler (yes, The Fonz) showing up on TV to promote them. You probably already know that these FHA-insured loans are basically just HELOC’s with an age minimum (62) and no monthly payments. As long as the senior lives in the home, interest accrues on the balance owed and the loan is repaid from the sale of the home.
What you may not know is that the closing costs — often pointed to as being the biggest objection to getting a reverse mortgage — have recently started coming down, making these loans more accessible for today’s struggling seniors. Most major lenders currently offer a fixed rate of around 5.5 percent that has no origination fee and no servicing fee (usually $20-$30 per month). This can result in thousands more in a senior’s pocket.
Another new wrinkle to reverse mortgages is that they can now be used by seniors to finance the purchase of a new home. In this way, retirees who are downsizing can keep more cash in the bank while having no mortgage payments on their new home.
Today’s Typical Scenario
Take, for example, a couple aged 67 and 68. They have lived in their home for 30 years and have seen it appreciate in value to $400,000. But now the property taxes, maintenance, stairs and utility costs are becoming too much and they want to downsize to a $300,000 condo. In today’s typical scenario, they would sell their home for $400,000, pay cash for the $300,000 condo and have $100,000 cash to put in the bank.
With a Reverse Mortgage for Purchase
A new option for those aged 62 and over is to do a “reverse mortgage for purchase.” In this case, the couple above could sell their home for $400,000, put a $150,000 down payment on the condo, and finance the rest of the purchase price ($150,000) from a reverse mortgage. As a result, they would be living in the condo with no mortgage payment, and now they have $250,000 in the bank instead of only $100,000!
A reverse mortgage for purchase can also help seniors afford a more expensive house. For example, if this couple had a $185,000 existing mortgage balance, they would not have enough equity ($215,000) to pay cash for the $300,000 condo. They would likely need to settle for a lower priced condo ($215,000 or less) since they likely wouldn’t qualify for an $85,000 mortgage due to a low, fixed income in retirement and today’s tighter lending standards.
With a reverse mortgage, they could sell their home for $400,000, pay off the existing $185,000 mortgage, put a $150,000 down payment on the condo and get the other $150,000 from a reverse mortgage. Not only does this allow them to afford the $300,000 condo they want, but now they are living in it with no mortgage payment and $65,000 in the bank!
Since reverse mortgages are FHA-insured loans, there are many rules and guidelines that need to be followed. While FHA wants to provide the “reverse mortgage for purchase” option to seniors, it seems as if it only wants to do so for plain vanilla transactions. If you have a client whose situation is in any way “out of the box,” this may not be the best option. It is important to work with a lender who is experienced in reverse mortgages to ensure that you and your client have the best experience possible.
Mark Schmidt is a reverse mortgage loan officer with Bank of America. He has an MBA from Loyola University and 12 years of experience as a financial analyst with Merrill Lynch and Bank of America. Schmidt was designated a Certified Senior Advisor in 2007 by completing additional studies of the social, physical and financial aspects of aging. He is the reverse mortgage expert for caregiverlist.com and examiner.com, and authored a book about reverse mortgages that was in Amazon.com’s top five before selling out. He can be reached at firstname.lastname@example.org.