Monday, August 1st, 2016
Reverse mortgages are typically seen as a way for seniors to remain in their homes while drawing income from their property. But a reverse mortgage can also be used to buy a home.
Here’s how it works: Seniors 62 or older buying a primary residence make a down payment and pay closing costs. They then get a lump-sum loan that goes toward the home purchase. No monthly payments are required to pay down the debt. Instead, interest accrues on the loan, and the principal and interest are usually due when the last co-borrower or spouse on the loan moves out or dies.
Most reverse mortgages are FHA-insured loans called home-equity conversion mortgages, or HECMs. The loan amount is a percentage of the home’s appraised value and starts at about 52% of the purchase price and rises with a borrower’s age, going up to about 75%.
In general, interest rates on lump-sum HECMs range from 4.25% to over 5%.
If desired, a senior with a reverse mortgage can leave a portion of the proceeds in a line of credit for future use. Interest is charged only on money that is drawn from the line of credit. HECMs that are lines of credit have interest rates starting in the 3% range, but these are adjustable rates that may change throughout the life of the loan.
Retirees often have trouble meeting underwriting requirements for regular mortgages, which are based on income more than assets. A reverse mortgage can give retirees the opportunity to move to a different home that better suits their needs, be closer to family or live in a warmer climate.
A top concern has been that seniors will draw down their home equity too rapidly, forcing them to exhaust other savings. But used strategically, buying a home with a reverse mortgage allows seniors to invest in higher-yield investments rather than their home.
Qualification rules and terms of the loan vary by the lender. Other considerations:
• Non-recourse loan. Reverse-mortgage loan amounts are based solely on the home value at the time of underwriting, which in the case of a purchase is the purchase price. So if the home loses value, neither borrower nor heir is responsible for making up the difference upon a sale.
• Foreclosure possible. Even though the homeowner is not making mortgage payments, a lender could foreclose if certain required expenses, such as property taxes, homeowner insurance premiums and homeowner association fees, aren’t paid.
• Not under construction. Currently HECM loans cannot be used to pay a builder for a home that is not completed.