How a reverse mortgage works


How about never making a mortgage payment?

Death, taxes and (if you want to own a home) mortgage payments never seem to go away. But there might just be a way to get rid of your monthly mortgage payment without paying cash for your home.

Many people have heard of reverse mortgages, which traditionally are reserved for older homeowners (age 62 and over) to use the equity in their home to pay the mortgage off over their remaining years by accruing the interest due against the equity in the home, resulting in the elimination of monthly mortgage payments. In some cases the borrower can also draw on their equity like a line of credit.

What few people know though is that a reverse mortgage can be used to purchase a home as well, and you never have to make a mortgage payment out of your own pocket. There are some limitations, but this FHA sponsored program is very real and can work well for the right person.

The short version of how it works is the borrower would purchase a home and generally putting between 40 and 50% down (the younger you are the more you put down). FHA will then lend you the money for the balance of the purchase price, and begin accruing the interest due against the equity in the home.

When the home is sold, or the borrower no longer lives in the property as their primary residence for longer than twelve months the loan and accrued interest become due. If the amount owed for principal and interest exceeds the sale proceeds, the borrower or his estate is excused from the remaining liability.

If there is equity from the sale then the borrower or his estate received the proceeds after the loan and accrued interest are paid. The borrower retains full title to the home, and can sell or refinance the home at any time and pay off the reverse mortgage without penalty if they so desire.

Some other general rules include that if it is a condo, the project must be FHA approved, which rules out virtually all condos in Eagle County, although townhomes should be eligible. Other Colorado Counties may have more choices as far as condos go.

The max loan amount varies with the age of the borrower but is generally in the mid to upper $300,000 range. The age eligibility is calculated by the younger of the couple. So if you’re a 70yr. old geezer with a trophy 29 year old wife, good for you, but you won’t be eligible!

Let’s look at an example. If an individual is 67 years old and looking at a $500,000 home he would qualify for a max loan amount of $324,000.00 meaning he would bring $176,000 down payment. FHA does charge a one time guarantee fee of 2% of the purchase price ($10,000) and monthly mortgage insurance of 1.2% of the loan amount. Other closing costs might total about

$3,500. Depending on the starting rate chosen the borrower could get a credit back to offset the $10,000.

The program does offer fixed and adjustable rates, with adjustable probably being the best deal right now, but the rate can adjust monthly. Currently that rate would be about 2.6% plus the monthly mortgage insurance which would make the rate about 3.8%. Bottom line is the interest and mortgage insurance cost is $972.00 per month.

So, our borrower moves into the house and lives there for twenty years and never makes a mortgage payment, although he does pay taxes and insurance. During that time approximately $233,280.00 in interest and mortgage insurance racks up on top of the $324,000 principal so he owes $557,280.00.

If the home is only generates $550,000 after it is sold the borrower or his estate is forgiven the difference. If the property generates $750,000 after selling expenses then the $557,280 is paid back and the owner or his heirs get the difference.

In the mean time, the borrower has been able to use his cash flow income for living expenses and preserved his other assets from being depleated. This can remove a enormous amount of uncertainty when planning for retirement, and allow seniors to "age in place".

This can also be a strategy for divorce settlements. One spouse might agree to give the ex the down payment required to get settled into a home with a reverse purchase money mortgage in and then there are no monthly house payments to work into the spousal support side of the equation.

Also, there is no income or credit qualification in most instances other than making sure there is some income to pay taxes, insurance and basic maintenance on the home.

There are many moving parts to a reverse mortgage, call me at 970-748-0342 to discuss it further, or click here to email me your questions!   In addition to the resort communities in Eagle, Summitt, Pitkin and Routt Counties I provide mortgages in all areas of Colorado including Grand Junction, Denver and Colorado Springs and Pueblo.