What is a “reverse mortgage” loan (or HECM) and why would I ever do that? It’s a popular question on a very common loan here in the St George, Utah area and probably most popular in Sunriver (our larger active adult community). Allow me to preface this by stating that I am an real estate agent here in St George and Sunriver, and I am NOT a loan professional, this is only an article written based on my knowledge and experience having had many clients, as well as family utilize this loan. The examples I’ll use below are only basic examples and no way apply to any particular circumstances.
A reverse mortgage can be obtained by anyone 62+. If one spouse is younger than 62 years old, a reverse mortgage can still be obtained, it will just require a bit more of a down payment, since the actual down payment is calculated on the age of the younger spouse (to obtain an exact amount you must speak to a loan professional). The short story is (for those who won’t make it through this lengthy article) is you will put around 50% down and you will not have any payments so long as you remain living in the home. The only thing you’ll be paying is HOA, taxes, and insurance (and of course typical home maintenance & utilities). What you WON'T be paying, is a loan payment. I’ll elaborate a bit more, further on.
Why would anyone do this loan?
Again, the short story is….everyone wants to spend $250,000 for a new home, so they’ll have money left for things they’d like to do (or simply have money for emergency or cash on hand). Once we begin searching for homes, the available homes in this price point are typically not checking off all of the “wants” for the buyer. The typical “want” list is more like: 1600+sqft, private backyard, view, newer, 3 car garage, upgrades…. Well….those homes are usually closer to $400,000 (or more, depending on specifics). So what’s a buyer to do? They only want to spend in the $200’s but they want to have the home in the $400’s. This is when the Reverse Mortgage comes into play. The buyer can have the $400,000 home and put their $200,000 down…viola! They got the home they wanted for the price they wanted to pay.
But I don’t want the government to take my home!
This is the biggest misconception of these loans. The government won’t just “take” your home. Yes, it’s a government loan, but so is any loan. Fannie, Freddie, FHA, VA….it’s all the same. So long as you’re living in the home, the home is yours. Now if you try to move to another home and rent out the Reverse Mortgage home, yes…your home will be sold…BUT….it’s not like this happens overnight without your knowledge—leaving you with nothing. You own the home. If you want to sell it—go right ahead. You’ll be paying off the loan (just as you would any other loan) and you’ll keep any proceeds left over. It’s discouraged to do a Reverse Mortgage loan only to turn around and sell it only because it’s a more expensive loan to have (but you’ll have all of the figures LONG before you sign any documents). The point of this, is that you CAN sell it—it’s your home! The government wont “take” it. If you move from it, they will step in and begin the process to sell it. When the last remaining original spouse passes away, that spouse can still leave the home to a beneficiary, which they can utilize the first year to sort through effects. After a year, the bank will step in and assign a real estate agent to list the home for sale. Once the home is sold, the bank loan will be paid off and if there are any remaining proceeds, it will be sent to the beneficiary(s). If, for example, the economy has declined into a low and the home loan payoff is $250,000 and the home is only worth $200,000; then the beneficiary may utilize the first year, then once it’s sold they will walk away. They will not be billed for the difference.
How does the loan work?
So, in a traditional forward loan, you make monthly payments and part of those payments goes to principal (to pay down the loan) and the rest goes toward interest. In a reverse loan, you’re not paying anything—however the interests will accrue each month. You’ll know the interest rate from the very beginning, so this won’t be a surprise. As an example, perhaps you’ll start out with a reverse mortgage loan of $200,000 and you live for 15 years, then you pass away and leave the home to your family, or beneficiary. Maybe the loan payoff is now $290,000 (again…I’m totally pulling all of these figures out of thin air—nothing has actually been calculated) and the home is worth $400,000. So your beneficiary can use the first year to sort through your things, estate sales, whatever they need to do….the home is sold, the loan is paid, and the beneficiary will receive a proceeds for the difference (less the payoff and real estate transfer fees). Yes, the loan will essentially get larger each month, but that is because you’re not paying anything over the life of the loan.
What type of home can I do a reverse mortgage loan on?
The answer is simple…any home! You can do a reverse mortgage on any home that meets FHA guidelines. The home has to be appraised, just like with any other loan. The biggest misconception I’ve found is that buyers believe they must do the reverse mortgage loan when they first buy the home—if they don’t, they cannot obtain the reverse mortgage loan. This is NOT the case. You can do a reverse mortgage any time you want to. Maybe you’re thinking of moving to St George, Utah but you’re not sure if you’re going to like it. You may consider purchasing a home with a traditional loan (or cash) and then once you decide you want to stay forever (most people do!) then you can apply for the reverse mortgage loan then. Here is a link with more information on a reverse mortgage loan.
If you’re interested in purchasing a home in St George, contact Paula Smith with Red Rock Real Estate today. I can assist you with all aspects of your purchase and put you in contact with a reputable reverse mortgage lender.