The Reverse Mortgage Loan became widely popular in the last few years. Seniors that owned their homes outright or had a significant amount of equity in the home could tap into that equity, making their cash flow greater during a time when they are on a fixed income. One way that many people are unaware that they can use this mortgage program, however, is to purchase a home. In many cases, this is a lucrative way to secure a home closer to family or one that gets you away from the bad weather during the winter. Understanding the pros and cons to this mortgage type can help you decide if it is right for you.
What is a Reverse Mortgage Loan?
First, you should understand what a reverse mortgage loan is and how it works. This FHA program gives you the cash you have tied up in your home. Let’s say you own your home free and clear and it is worth $200,000. That is $200,000 just sitting there unused. What if you needed that cash? You could get a percentage of it with a home equity loan as younger borrowers would have to do or you could take out a Reverse Mortgage. This program gives you the cash you need and does not require you to pay it back until you die or sell the home.
This means if you die with a Reverse Mortgage outstanding, your heirs must pay the mortgage, which includes principal and outstanding interest, before taking their share of the proceeds. If you sell the home before you die, it works the same way it would if you held a standard mortgage on the property – you must pay all liens before you receive any money at the closing.
Using a Reverse Mortgage to Buy a Home
Now, what if you want to purchase a home with a Reverse Mortgage Loan? It is possible; the program is called the Home Equity Conversion Mortgage for Purchase. Congress created the program to help make home purchases easier for seniors by reducing the money the costs and confusion that purchase transactions can cause.
If you are a senior aged 62 or older, you are eligible for the program. The older you are, the less money you need to complete the program because you are eligible to receive a larger mortgage amount. For example, a 62-year-old would receive a lower Reverse Mortgage amount than an 80-year old would receive.
In order to qualify for the program, you must have the required down payment based on your age. Generally, it starts at a 50% down payment and decreases from there, the older you get. Basically, it is based on life expectancy and how long a lender expects their money to be outstanding since you do not make any payments on the mortgage until you die or sell the home. The money you use for the down payment can come from a variety of sources including the proceeds from the sale of your current home if you are downsizing or moving closer to family; a savings account or investments. The down payment cannot be any type of loan, but it can be a gift from a family member.
How you Pay the Interest
The longer you live in the home, the more interest you accrue on the mortgage. If you live in the home too long, the interest could swallow up any equity you have in the home. This should play a considerable factor in your decision to take out the Reverse Mortgage Loan. You should always discuss with your lender how much the interest is and how it will accrue over the life of the loan so that you are not in for an unpleasant surprise if you decide to move or to leave for your heirs upon your passing.
The Maintenance Costs
You should also consider the maintenance and upkeep costs involved with owning a home. You are still responsible for the taxes and insurance on the home as well as the normal maintenance costs. If you default on your taxes, the county can take possession of your home, just as they would with a traditional mortgage, so make sure to figure this into your expenses.
In the end, the Reverse Mortgage Loan is a great way for older seniors to purchase a home, whether they need to downsize or just want to move somewhere different. The home must be a primary residence for you and you must have the money to put down on it according to the lender’s guidelines. The program is FHA based, so there are similar guidelines from lender to lender, but just as is the case with any other mortgage program, every lender has their own requirements.
As you shop around to find a Home Equity Conversion Mortgage for Purchase, make sure to pay careful attention to the closing costs and interest rates. Even though you will not pay anything aside from your down payment upfront, each of these costs will eat away at your equity in the long run. The more informed you are on the process, the more successful the program can be for you and your family.