Approximately 70 percent of America’s elderly own their own homes and 80 percent owe nothing, according to HUD statistics.
If you are property rich and cash poor, a reverse mortgage could put you in that vacation condo sooner than you think.
Reverse mortgages are aimed at individuals 62 years or older who own their homes – either debt-free or close to it – and who have a need for additional cash. The homeowner cannot be displaced and forced to sell the home to pay off the reverse mortgage, even if the principal balance grows to exceed the value of the property.
The lender never takes title to your property. If the value of your house exceeds what is owed at the time of your death, the rest goes to your estate.
HUD’s Home Equity Conversion Mortgage (HECM) is the most popular reverse option available today. All HECM loans have been guaranteed by the Federal Housing Administration.
The reverse mortgage can be used to acquire a second home. For example:
- Bob Crawford, 72, and his wife, Jane, 71, have a $235,000 home in St. Louis.
- They take out a lump-sum reverse mortgage on their primary residence totaling $106,000.
- They buy a vacation condo for $125,000 in New Mexico with the money ($106,000 plus $19,000 from Bob’s retirement).
After a decade of no loan payments, they choose to downsize. They sell their primary residence, pay off the underlying debt and move to the New Mexico condo. Using an average appreciation rate of 4 percent on the primary residence and a 7 percent interest rate on the loan, the balance on the loan would have increased to $253,198 and the value of the home increased to $347,857. If the home netted that amount upon sale, Jane and Bob Crawford would put $95,659 in their pocket.
Remember they have made no mortgage payments – on either home – for the past 10 years.
For a reverse mortgage lender in your area contact the National Reverse Mortgage Lenders Association