Recently our agents and I received training on Home Equity Conversion Mortgages (HECM), better known a “reverse mortgages.” These loans can be taken out on your current home or used to purchase a new home. What makes them particularly attractive is how they can turn your home from an expense (if you have a mortgage currently) into a source of money for the rest of your life after age 62.
In a normal mortgage, you have monthly payments of PITI—principal plus interest plus taxes and insurance. With a reverse mortgage, the principal increases instead of decreases because the principal and interest is being drawn from the equity you have in your house.
If you have longevity in your genes and don’t need to leave the value of your house to your heirs, this can be a good solution because no matter how long you live, as long as you continue to live in your house, you will never be “upside down.” The mortgage continues to be paid even after your equity is used up. When you die and the house is sold by the lender, any shortage in payoff is covered by the mortgage insurance which is built into the loan.
This scenario is not for everyone, but it has enough advantages that it is worth speaking with a reverse mortgage specialist who can study your financial situation and help you decide if a reverse mortgage is right for you.
We had such a specialist — Jim Spray of MilestoneMtg.net, dba The Mortgage Company — speak to us and answer such questions as:
What happens if both husband and wife are on the mortgage and one of them dies? The surviving spouse can stay in the house until he or she dies.
What if you go into assisted living? Once all borrowers on the loan no longer live in the house, the loan must be paid. If there’s still equity in the house, it can be listed and sold just like any other house, and the loan is paid off. If the equity has been exhausted and you’re “under water,” then you deed the home over to the lender and walk away not owing anything.
What if a son or daughter wants to buy the house? They can buy the house, with the loan paid off at closing, but if the house has negative equity, they can buy the house from the lender for 95% of its appraised value, regardless of how large the principal had grown.
Are property taxes and insurance escrowed? No, you must pay those directly, along with HOA dues.
Can you take cash out when you refinance with a reverse mortgage? Yes, depending on your age, you can take out half or more of your home’s appraised value when you refinance into a reverse mortgage. The older you are, the more you can take out, based on actuarial tables. That’s why I say that if you have longevity in your genes, you could take out your full equity in your home before you die and continue to live in the house until all borrowers die without making any mortgage payments again—just taxes, insurance and HOA dues.
Can I sell my house and downsize? You should do that before you take out a reverse mortgage. Sell your house now, buy your perfect “forever” home, and finance it with the reverse mortgage, putting down only the minimum down payment based on the actuarial tables. Keep the other proceeds from the sale of your current home as cash to spend, save or invest as you wish.
What about Social Security? As you know, you get a much higher Social Security payment if you wait until age 70 to start drawing it. Refinancing or purchasing with a reverse mortgage at age 62 could make it possible by lowering your living costs for you to wait until age 70 to start drawing Social Security.
What if my credit isn’t very good? Unlike with a regular mortgage, credit is not a factor in approving a reverse mortgage, barring recent bankruptcy or other derogatory factors. You need only prove that you’ll be able to keep paying the taxes, insurance and HOA fees (if any) on your home. Not doing so risks foreclosure.
You probably have many other questions. If I can’t answer them for you, I’d be happy to connect you with Jim Spray or another reverse mortgage specialist.
Published Sept. 8, 2016, in the YourHub section of the Denver Post and in four Jefferson County weekly newspapers.