The amount you can borrow under HECM for Purchase in a reverse mortgage depends on:
—The age of the youngest borrower or non-borrowing spouse.
—The current interest rate.
—The home’s appraised value.
—The initial mortgage insurance premium.
Many of the costs can be wrapped up into the loan, Didyoung says.
The new house is titled in the senior’s home, but the reverse mortgage lender still retains a security interest in it. There are no monthly payments as with a typical mortgage. Instead, the loan has to be repaid when the home is sold or the borrower moves out or dies. The repayment to the lender includes the amount borrowed, plus accumulated interest. Any remaining equity belongs to the borrower, heirs or estate.
“There’s also guaranteed no personal liability at (the) end,” Didyoung says. If the loan balance on the reverse mortgage exceeds the home’s value, the lender is insured against that loss.
Why It Can Be Good
A reverse mortgage for purchase allows older Americans to buy a house that better suits their needs without dumping all their retirement assets into it, which would be the case in an all-cash transaction. It also lets them avoid dipping into their monthly fixed income, which would occur if they took out a traditional mortgage.
“This is not just a mortgage product. It’s a financial, cash-flow tool for retirees,” says Rob Cooper, national director of strategic partners for Reverse Mortgage Funding. “It gives them more purchasing power if they don’t want to drain all their assets. It also gives them the luxury to get a better lot, to add all the upgrades they want and to still have no mortgage payment.”
Possible Pitfalls
One drawback is that the senior loses equity in the second home, rather than building it, ReverseMortgageStore.com’s O’Connell says. The owner or the heirs get whatever is left in equity after paying off the reverse mortgage. In some cases, depending on the housing market, that may be nothing.
“The pitfalls are the result of the benefit of having no payments,” O’Connell says, “As a result, you have a higher loan balance. You have accruing compound interest. It’s a trade-off.”
Janna Herron is a contributing reporter for Bankrate.com.
©2014 Bankrate.com
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