How a reverse mortgage works for a purchase or refinance

Use a reverse mortgage to never have to make a mortgage payment again

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 by using a reverse mortgage.

Many people have heard of reverse mortgages, which traditionally are reserved for older homeowners (age 62 and over for most reverse programs although there is one for borrowers as young as age 55) 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 or get a lump sum cash out, or a monthly stipend payment.

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 many 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 $400,000 range for an FHA loan. 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!

There are reverse mortgage programs that will go as high as $3,000,000 loan amount and these are the programs available to borrowers as young as age 55.  These loans are not FHA regulated, but the terms are very similar.

How does this work on a purchase?

For an FHA insured loan let’s look at an example. If an individual is 70 years old and looking at a $500,000 home he would qualify for a max loan amount of $300,000  meaning he would bring $200,000 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 $5,000.  Depending on the starting rate chosen the borrower could get a credit back to offset the closing costs but a higher start rate might mean a lower loan amount.

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 2.0% plus the monthly mortgage insurance.    But keep in mind the borrower does not write a check for that amount, rather it is added to the principal balance and paid at some point in the future when the loan is paid off.

When the loan is sold if there is money left over after paying off the reverse mortgage loan that money goes to the seller or his estate.  If there is no equity left then the lender takes the property and there is no recourse to the seller or his heirs.

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 depleted. This can remove a enormous amount of uncertainty when planning for retirement, and allow seniors to “age in place”.

How can this work for a divorce settlement?

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.

You can also get a cash out 2nd mortgage structured as a reverse mortgage.  

Just recently I have been able to offer borrowers who want to keep their current mortgage (as it often has a good rate) but need cash out a 2nd mortgage that is similar to a conventional reverse mortgage.  The way this works is you leave your 1st mortgage in place and continue to make your monthly payments.  The new 2nd mortgage is for a set amount of cash out and the interest accrues monthly, you never make a payment.  When the house is eventually sold by you or your estate both mortgage have to be paid off in full and whatever equity is left is paid to you at the time of closing.East-Vail-house

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.