You may have heard of using a reverse mortgage to tap into home equity and using that money to stay in a longtime home. However, US News tells us in “How to Buy a Retirement Home with a Reverse Mortgage“ that you can also use a reverse mortgage to buy a home.
This is nice for folks who want to relocate and can’t afford mortgage payments in retirement or are unable to qualify for a conventional mortgage. In addition, it can be a financial tool to delay taking Social Security benefits or to preserve cash.
In a reverse mortgage, the bank pays you a predetermined percentage of your home value. This money can be a lump sum, monthly payments, or a line of credit.
To qualify, you have to be 62 or older, and the home you’re buying must be your principal residence.
The advantage to a reverse mortgage is you don’t have to make payments. It lets you retain some cash.
You can’t buy a home with a reverse mortgage unless you have enough money to make a sizable down payment (typically about 50% of the purchase price). If you get a Home Equity Conversion Mortgage—backed by the FHA—the maximum home value you can borrow against is $625,000.
A line of credit may be a better option than a lump sum for most people using a reverse mortgage because people make bad decisions when they get all the money at once and then have nothing for later.
When you die or leave the home, the mortgage will be due, and your heirs will get any equity that hasn’t been eaten up by interest and fees. If you live a long time, there won’t be any value left, and the home will go to the bank. In addition to this, the other downside of reverse mortgages is the high fees. Lenders can charge as much as $6,000 in origination fees. That’s negotiable, but you also pay all the fees you would with a traditional mortgage, like appraisal fees and title insurance. There’s also a mortgage insurance premium upfront and every year thereafter, not to mention fees to servicers. All of these are added to the mortgage balance.
Shop around and get a good deal. Some of the fees are negotiable, as are interest rates. Get two or three estimates and compare. Evaluate the decision to use a reverse mortgage as part of a total financial plan.
Reference: US News (November 30, 2015) “How to Buy a Retirement Home with a Reverse Mortgage”
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