When it comes to Reverse Mortgages in general, they tend to be a grossly overlooked financial tool by many homeowners and financial planners alike. Yet, surprisingly, many homeowners and financial planners don’t truly and intimately know how these financial products actually work. Often times they currently overlook them due to outdated information and / or misconceptions that just aren’t true.
However, in recent years Reverse Mortgages (AKA, HECM’s which stands for Home Equity Conversion Mortgages) have been gaining momentum among the financial planning community. This is mainly because many have made a concerted effort to really understand this financial tool. Frankly, this is a breath of fresh air as I firmly believe a financial planner should have a firm grasp on the ins and outs of ALL financial tools.
While we’ll briefly discuss what a reverse mortgage is, the intent of this article is not to educate you on all the minute details of the reverse mortgage. Rather, it’s to discuss how a reverse mortgage
can be used to purchase a home.
What a Reverse Mortgage is in the simplest of terms:
A HECM is a home loan like any other that enables a homeowner to access a portion of their equity and convert it into currency they can actually use. Rather than making a payment every month to pay down the balance, it does not require a monthly payment for as long as the homeowner lives or for as long as they live in their home. In essence, the payment stream is reversed.
Wait, didn’t I mention converting equity to a usable currency? Yes I did and the following will explain how it translates into using a HECM for purchase.
It’s important to know “how much you get” when you do a Reverse Mortgage.
You have to be at least age 62 to get this type of financing in the good old USA. The amount you get moves on a sliding scale that increases up until the point where a homeowner is 90. You don’t get any additional funds for being aged 91, 92, or 93 etc. The range (As of August 2014 through the present (November, 2016) is 52.4 percent to 75 percent. If a homeowner or home purchaser is 62 or older, but has a spouse that is younger than age 62, then the percentage you get is less because it would be based on the younger spouse’s age (allows both spouses to live in the home for the rest of both of their lives).
The two big differences between a HECM for purchase loan and a traditional loan:
- With a reverse mortgage, the homeowner does not need to make a monthly mortgage payment for as long as they live or for as long as they live in the home (although you can if you want to or need to for any other strategic financial reasons). This is what makes this type of loan so desirable for many. It gives the homeowner a tremendous amount of control financially and eliminates the burden of a housing payment.
- There are many traditional loans that are geared towards low or no down payment. If that’s what you need, this is not the loan for you.
Here’s roughly how it might work for a 62 year old that’s looking to downsize. Let’s say that below is there current scenario:
– Home that’s being sold value = $175,000.
– Amount owed = $35,000
– Cash realized after sale of home (not including any real estate agent commissions) = $140,000.
In this example, we’ll say they are buying a house for $100,000. Often times, retired or older homeowners will pay cash for the home they are downsizing to. It can be a good idea because you can reap the benefit of selling the bigger home for more than what the new home will cost and then pay cash for the new home (eliminating a mortgage payment) and still have money left over.
So, in this case the homeowner would take $100,000 from the proceeds of the sale of their previous home and be left with $40,000 in the bank on top of what they may already have (or not have).
Here’s how it would look if the same couple used a reverse mortgage to buy the home:
ASSUMPTIONS: Youngest buyer/borrower is age 62.
Remember, at age 62 you get about 52.4% of the appraised value (or purchase prices). So, if this couple used a reverse mortgage to purchase their $100,000 home they’d get a reverse mortgage for $52,400. In this case, they’d need to put the difference of $47,600 as a down payment. Hence, of the $140,000 of the sale proceeds they’d have $92,400 left over to keep in the bank (minus a small amount for closing costs).
For some, it’s a no brainer. You can buy a home and NOT have a mortgage payment with both scenarios, but if you pay cash, you only have $40,000 left over. If you use a Reverse Mortgage (HECM) for purchasing your home, you’ll have around $90,000 left over. Not bad!
Not all financial products are for everyone, but the reverse mortgage purchase loan can be a very strategic, smart way to purchase your next home (or, if you’re a real estate professional, a great way to help get your clients into a new home).
For more info on a Reverse Mortgage purchase loan or and traditional HECM / Reverse Mortgage contact:
Shawn Vaillancourt (714) 271-8524
Licensed in the following states; CA, CO, MD, OR, VA, WA
I also have a staff of reverse mortgage specialists in virtually every other state in America.
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