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Reverse Mortgages: the What and the How

Many Americans who are close to retirement or have recently retired and have significant home equity may want to consider the use of a reverse mortgage. Per John Salter, associate professor of financial planning at Texas Tech University – “Prior to 2011, reverse mortgages were expensive and really only made sense in the case of financial hardship.  Today, the costs can be on par with a traditional home mortgage”.  

A good case can be made for using a reverse mortgage to complement your investment portfolio.  For example, during investment market downturns, you can pay yourself without selling and locking in investment losses.  Read on to find out more about the features of reverse mortgages and stay tuned for our next blog post on the important uses of a reverse mortgage in a financial plan.

 

Who can qualify for a reverse mortgage loan?  The borrower must…..

  • Have either no mortgage or a very modest mortgage.
  • Be age 62 or older.
  • Meet Federal Housing Authority (FHA) guidelines similar to most mortgage applications.

 

What are the key features of the reverse mortgage loan?

  • Provides access to equity in your primary residence.
  • Replaces all mortgages and liens.
  • Lender cannot freeze, reduce or cancel if borrower meets terms of the loan.
  • FHA insured and non-recourse- the borrower never owes more than what house is worth when repaid.
  • Last as long as you live in the home.
  • Funds available as a line of credit, lump sum, or monthly payment.
  • Unused portion of reverse mortgage line of credit guaranteed to grow despite home value.

 

Hypothetical reverse mortgage example using a couple where the youngest borrower is 62 years old and owns a home with a $360,000 value:  

  • Initial reverse mortgage borrowing limit - $190,000 - Depends on borrower age and interest rate, in this case age 62 and 6.0% rate - the older the borrower and the lower the initial interest rate, the higher the initial available loan limit
  • Initial mortgage interest rate – 6.00%
  • Closing Costs - $9,000 - Can be close to zero or higher than $9,000 but depends on other terms  
  • On-going Costs: 
  • As of August 2016- 1 year Libor rate (London Interbank Offered Rate and resets monthly)– 1.50%
  • FHA annual insurance premium (locked in) – 1.25%
  • Lender Margin (locked in at closing) – 3.25% - Can range anywhere from 2.0% to 3.25%