The Swiss Army Mortgage
Here’s the most common reasons homeowners age 62 or greater give me for why they want the FHA reverse mortgage:
- I don’t want a mortgage payment anymore.
- My savings are getting low and I’m getting concerned.
- There are some things I want to do to the house.
- I want to retire but I can’t/won’t do that until I no longer have a mortgage payment.
- My investments took a big hit in the last recession.
- I’ve got debts I want to pay off; some have high interest rates.
- I need someone to come give me some assistance at home but my income isn’t enough to pay for it.
- I’m getting divorced and I need to either pay my spouse or find another home.
- I want to secure access to some money I can easily get to if something comes up.
- I found a retirement home I really like but I don’t want to tie up all that cash and I don’t want a mortgage payment.
While these are the most common scenarios there are many others. Each client’s story is unique to themselves. The reverse mortgage can be a solution to each of these situations because it’s a very flexible home loan. This flexibility is its most underappreciated quality. It’s the swiss army knife of the mortgage world.
The homeowner’s obligations under the terms of the reverse are to stay current on property taxes, homeowner’s insurance, homeowner’s association dues (if applicable), and to maintain the condition of the home. As long as the homeowner fulfills these obligations they have no monthly mortgage payment obligations for as long as the home remains their primary residence.
A reverse mortgage comes due once no borrower is living in the home as their primary residence. This occurs due to them passing away, moving, or selling. At that point the estate decides if they want to keep the home. They can keep it if they want by paying back what is owed. Most frequently, the heirs sell the home to repay the loan and the heirs get the remaining equity. If the amount owed is greater than the value of the home at maturity neither the borrower nor their estate is liable for the shortfall. This is because of the non-recourse protection this program has. No other assets can be touched.
Any loans or liens against the property must be satisfied prior to or at the time of the reverse mortgage loan closing so loan proceeds are used for this purpose first. Loan proceeds available after all mandatory obligations are met may be accessed in a variety of ways but fall within three categories: an initial draw at the start, monthly payments to the homeowner, or a line of credit. Sometimes part of the loan proceeds are set-aside to pay property taxes and homeowner’s insurance premiums on behalf of the homeowner for their expected life-time.
The reverse mortgage line of credit (RELOC) is unique from a home equity line of credit (HELOC) in several ways. A HELOC requires a monthly loan payment once funds are used; a RELOC does not. A HELOC in good standing usually can be frozen or reduced by the lender/bank; a RELOC in good standing cannot. A HELOC allows a first or second mortgage to remain in place. A RELOC requires they be satisfied and closed. For a HELOC, additional credit might be extended to the homeowner depending on their equity position and credit and income qualifying; for a RELOC the existing credit line is automatically growing each month at the same rate as the cost of money. In other words, if on January 1 you had access to $100,000, assuming you didn’t take a draw in January, on February 1 you would have access to $100,458.33 assuming the cost of borrowing money is 5.5%. This is a very unique opportunity for increasing future cash-flow for homeowners not planning to use much of their RELOC right away.
The FHA reverse mortgage is only for homeowners age 62 and greater. Its uses are varied because of the flexibility of the program. It’s an opportunity for the home to pay you back for the many years you’ve paid in to it. Have a plan for how to best take advantage of housing wealth, just as you’d have a plan for other, more liquid, financial assets. After all, for many retirees the house is the largest asset.
Synergy One Lending, Inc. dba Retirement Funding Solutions. NMLS ID 1025894, HQ 3131 Camino Del Rio N, Suite 190, San Diego, CA 92108, 877.721.3847. Greenville Branch 1541 Wade Hampton Blvd, Greenville, SC 29609, 864.906.2296. These materials are not from, and were not approved by HUD or FHA. The 5.5% rate stated does not constitute an offer to lend nor any rate guarantee but merely an example to demonstrate Line of Credit growth. Rates subject to change without notice.