Should Retirees Buy a Home With a Reverse Mortgage?
How do you buy a home after retiring?
If you have one that’s paid for, you could sell and use the proceeds to buy another. You could raid your savings if you have enough.
Or you could get a mortgage if you have enough income and good credit. But even if that’s possible, who wants to take on a big monthly mortgage payment after quitting work? Many advisors discourage debt at that stage in life.
But there’s another opportunity, often overlooked: Get a reverse mortgage on the new home. With a reverse mortgage, you borrow against the property’s equity but make no payments. Instead, the interest is added to the principal and both are paid off after the home is sold. You can keep the loan for as long as you live in the home, and no matter how old you get the lender cannot force you out so long as you keep up with taxes, insurance and upkeep, even if the debt grows to be more than the home is worth.
This strategy is available for homebuyers 62 and older through the Home Equity Conversion Mortgage for Purchase program backed by the federal Department of Housing and Urban Development, which insures the lender against loss should the home’s eventual sales proceeds fall short of the debt.
Experts say the product can work for some people, though not all, arguing it’s a useful option when there are no others, but warning about fees and the cost of paying interest on interest.
“It may be a good idea for consumers who are able to pay the taxes on their home and maintain it, as this financial product does not eliminate responsibility for these expenses,” says Tom Holsworth, business development manager for Quontic Bank in Indianapolis.
“It’s a relatively small demographic for whom this is a legitimate option,” says Jeremy Colonna, senior loan originator with Matchpoint Funding, a real estate lender in Los Angeles. Many consumers, and even real estate agents, are unaware of the program, he says, describing it as useful for people who cannot get a regular mortgage on their own or with family members as co-signers.
To reduce the risk of debt exceeding the home value, lenders will not loan the home’s full purchase price, so the homeowner must have other assets to make up the difference – typically from savings or sale of another property. These loans are available only for a primary residence, and must be paid back when the homeowner moves or dies. Vacation homes do not qualify.
“Many elderly homeowners want to remain homeowners, but not in their current house,” says Jack Guttentag, a retired Wharton finance professor, in a posting on his website, The Mortgage Professor, where he offers advice and refers to users to mortgage products that meet his standards. “They may want a house that is smaller, or without stairs, closer to family or friends, in a warmer climate, or whatever. If they are over 62, a HECM reverse mortgage may ease the financial pain of the purchase.”
A tool on his site shows a 62-year-old in in the Philadelphia suburbs could get nearly $200,000 toward a $400,000 home, with a mortgage rate of 4.5 percent. The program also charges an annual insurance premium of 1.25 percent of the loan amount.
An older borrower can get more, since there’s less chance the debt will grow larger than the home’s value. If the borrower in the example were 82 instead of 62, he could borrow $255,968 instead of $200,000.
Guttentag describes two other ways to use a reverse mortgage to buy a home while avoiding mortgage payments:
-Pay cash and then get an ordinary reverse mortgage to pull equity from the property to replace some of the assets used. This option can work for one who wants to build a new home, since the HECM cannot be used to build (though it can be used to buy a newly constructed home that’s finished).
-Get a regular mortgage and then pay it off with a reverse mortgage later. This would mean paying closing costs twice, and the borrower would need a decent credit rating and enough income to qualify for the first loan.
Article by money.usnews.com