Reverse Twist: New House With No Payments
Mobile seniors who want to relocate to warmer climates, move closer to their children or just get away from the maddening crowds can now buy a new house without incurring any mortgage payments.
With a new generation of reverse mortgages now being offered by scores of lenders across the country, people who are at least 62 have far more flexibility than they would with standard financing.
For example, there are no income or credit requirements. Qualification is based entirely on your age and the value of the home you intend to purchase, so you may qualify for a larger, more expensive house than you think you can.
In addition, the loan--which has been dubbed Home Keeper for Home Purchase by its creator, Fannie Mae--allows you to use your personal savings--and, if you are a homeowner already, the proceeds from the sale of your current residence--more efficiently. And it also lets you conserve your cash so you can live out your remaining years more comfortably.
But best of all, you won’t have any monthly payments for as long as you and your spouse live in your new castle. Only when you move or pass away will the loan be due and payable. And if the place is worth more than what you owe, the balance will go to you or your heirs. In short, the new loan gives older home buyers a broader range of financial options than they’ve ever had before.
Still, there is some question as to whether the latest wrinkle in reverse loans will catch on. After all, the new version is even more complicated than the standard one, which is not exactly lighting up the mortgage-market scoreboard.
At the same time, however, Home Keeper for Home Purchase was developed in response to seniors who expressed an interest in reverse mortgages, but didn’t want to remain in their current homes.
“A number of our lenders have heard from consumers who want to know if they could do this,” said Robert Sahadi, vice president for product development at Fannie Mae. “It’s something we never considered until we started looking at the Census data and found out this is quite a mobile generation, more so than we ever thought.”
*
According to the latest Census Bureau figures, nearly 1.7 million people 65 or older moved between March 1992 and March 1993, and about 25% of them moved to a different state. Fannie Mae estimates that every year, almost 150,000 people 62 or older buy houses--about 50,000 are bought with cash and the rest with a mortgage. And those figures will only grow larger as more Americans than ever reach senior-citizen status over the next decade.
Reverse mortgages allow elderly homeowners to tap into the equity they’ve built up in their homes over the years without having to sell. They are called reverse mortgages because they “reverse” the direction of payments; instead of paying the lender, the lender pays you.
You can take the loan proceeds in one lump sum, in set monthly amounts, or as a line of credit at times and in amounts of your choosing. But you don’t have to repay the loan as long as the house remains your principal residence.
Furthermore, a borrower can’t be forced to sell or vacate the property to pay off the loan, even if the total mortgage plus interest exceeds the home’s value. And if the balance due does wind up surpassing the home’s value, the borrower or his estate will never owe any more than what the property is worth.
Reverse mortgages are ideal for “house rich, cash poor” homeowners who have a lot of equity but not enough income to pay their bills, keep their homes in good repair and enjoy their remaining years.
Seniors who want to buy another house have a different set of problems, especially if they don’t want to be strapped with a new round of mortgage payments. Generally, they’d have to sell the old place first, buy a new one for cash and then take out a reverse mortgage.
That means two sets of closing costs--one to buy the new house and another to obtain the reverse loan. But with Home Keeper for Home Purchase, you can combine the transactions into one, substantially reducing your outlay and gaining instant access to your equity.
The loan can also be used as a financial management tool, since it allows seniors who have enough money to live on and also have cash in the bank to use their savings more efficiently.
Take 76-year-old Widow Bell, for example. She netted $100,000 from the sale of her old homestead in Detroit, and now she wants to buy a $100,000 ranch house near her son in Tucson. At her age and with the value of the new property, she’d qualify for a $52,000 reverse mortgage.
Consequently, Bell would only need $48,000 from the sale of her current house to complete the deal. She could keep the rest of the money to do with as she sees fit--she can live on it, invest it or put it under her mattress for a rainy day.
The loan can also be used to increase your buying power, enabling those of modest means to make lifestyle changes that otherwise might not be possible.
Consider, for example, Jack and Nana Rose, both 76 and living on Social Security and a small retirement check. They will net $75,000 from the sale of their current house in upstate Vermont, where the winters are harsh. And they have their eyes on a small, $115,000 place north of Tampa.
Normally, they’d have to take $40,000 from savings to complete the deal. Either that, or they’d have to qualify for a standard mortgage and make monthly payments.
Based on Home Keeper for Home Purchase’s actuarial tables, however, they’d qualify for a $60,000 reverse mortgage. And with $55,000 from the sale of the old house, they could buy the Florida house and still have $20,000 left over. Better yet, they wouldn’t have to borrow from their savings, and they wouldn’t have to make any house payments.
*
However while the new loan can be considered both a financial and a lifestyle tool, it is not without its drawbacks. For one thing, it is an adjustable loan that is subject to the vagaries of the market. And besides being complicated, it is not cheap.
Rates are somewhat higher than on standard loans, and lenders charge up to 2 points (a point is equal to 1% of the loan amount) to make the loans because more work is involved. But closing costs are less because there is no credit report and most of the fees, including the lender’s, can be included in the loan balance.
In addition, if there are husband and wife co-borrowers, both must be at least 62. And they must occupy the new property as their principal residences. Vacation homes don’t count.
Neither do condominiums, even though many seniors find these smaller, low-maintenance dwellings more to their liking than detached houses. But that could change if the new loan takes off as Fannie Mae hopes it will.
More than 400 lenders have signed up to offer the Home Keeper for Home Purchase reverse mortgage. To find the ones nearest you, call Fannie Mae at (800) 732-6643.
* Distributed by United Feature Syndicate.
