Welcome to another episode of Coffee, Homes, and Loans! Today our guest is our amazing manager Erin Freemal at Movement Mortgage, and our topic is Reverse Mortgages. Let’s get started!
What are Reverse Mortgages?
Reverse Mortgages are a HUD (The Department of Housing and Urban Development) or FHA (The Federal Housing Administration) backed mortgages. This loan program is designed for borrowers who are 62 years or older and can be used to buy a home or to do a rate/term refinance or cash out refinance. This is a great loan program for borrowers who are perhaps retired and on a fixed income and have equity in their home. Essentially it will remove their mortgage payment and give them the ability to receive cash back in the form of a home equity line of credit that grows over time, cash right to their bank account and reduce their housing payment to just taxes, homeowners’ insurance and homeowners’ association if applicable.
What are the requirements?
Borrowers must be 62+ years old, have a minimum credit score of 580, have a stream of income (retirement, dividends, social security, pensions, current employment), have equity in their home and cannot get 100% of the home value. The cash out amount is calculated based on the youngest borrower’s age.
What happens when the borrower(s) passes away?
If you obtained a reverse mortgage as a married couple, then the surviving spouse would remain the property owner with no changes in their loan terms until he or she passes away. When both spouses have passed, the home will be given to the person listed as the beneficiary in their trust or inheritance or probate. The new owner cannot keep the reverse mortgage, they can sell the property, refinance it with a new mortgage loan under their name or pay off the loan.
Are there any cons or disadvantages?
We cannot find any. Reverse mortgages, like all other mortgages, are highly regulated by the different government agencies. It’s important to interview different loan officers to make sure you establish a trust relationship with them, and they are the right person to work with your financial advisor, attorney, and family.
A couple of examples:
Example 1 – Mr. Jackson and his wife are 81 and 83 years old respectively and owe a mortgage balance of $200,000 on their home, their home is valued at $600,000, their medium credit score is 680 and have a combined monthly income of $4,000 in retirement/pension/social security. They could: 1. Remove their monthly mortgage payment. 2. Take out $29,000 cash back in their bank account and 3. Open a credit line of $42,000. *These numbers are just an estimate based on assumed credit qualifications.
Example 2 – Mr. Smith is 62 years old and is relocating from bay area in California to Las Vegas, NV. His net proceeds are $450,000 which he decides to use towards a down payment on a reverse mortgage for a property worth $600,000 in a senior community in Las Vegas. With a credit score of 720, monthly income of $6000. He is looking to cut his expenses by not having a mortgage payment and enjoy his retirement years. *These numbers are just an estimate based on assumed credit qualifications.
Have questions? Reach out to us, every scenario is very different but we are dedicated to creating an action plan designed for you.