What is a Reverse Mortgage by Jason McConahy

 What is a Reverse Mortgage by Jason McConahy 

WHAT IS A REVERSE MORTGAGE?

In its simplest form, a reverse mortgage is a tool for people who are at least 62 years of age that allows you to borrow against your home’s equity for a variety of benefits. Any proceeds from the reverse mortgage are non-taxable, and there are no mandatory principal or interest payments on the borrowed money. 

If you choose not to make any principal or interest payments, the loan grows over time rather than getting smaller(which is the reverse to how loans are normally paid off). You can defer repayment until

you sell the home or the last borrower on the loan passes away. 

If you choose to make principal and interest payments, then the loan functions like a line of credit where those funds are available to borrow again. The best part about this line of credit is that it grows

over time!

What can a reverse mortgage be used for?

The technical name for a “reverse” mortgage is a Home Equity Conversion Mortgage (HECM), which is a good descriptor of what it does for you… it converts a portion of your home equity into cash that can be used in so many ways. Think of your home equity as a portion of your overall wealth and a HECM as a tool that allows you to integrate your home equity into the way you manage your retirement. A HECM can be used for…

- Home improvements

- Home care and health needs

- Unplanned expenses during retirement

- Passing along wealth / charitable giving

- Supplement income to stretch your IRA / retirement funds

- Cover the tax burden for events such as a Roth IRA conversion

- Funding activities (such as travel) that aren’t possible with your fixed income

- You can also eliminate your current mortgage payment, increasing your monthly

tax flow (you are still responsible for taxes, insurance and HOA payments)

Can you use a reverse mortgage to purchase a home?

Yes! You can use a HECM to purchase a home! Most people want to move in retirement, but many think they can’t afford it because “right-sizing” often requires a more expensive home. A HECM allows you to take the proceeds from your current home and expand your purchasing power. For example, at age 62, a down payment of $500,000 allows you to buy a $750,000 home with no mortgage payment (you are still responsible for taxes, insurance and HOA payments). The HECM is a great tool for relocating into your ideal retirement home that is suitable for aging in place for the years to come.

When would you NOT want to utilize a reverse mortgage?

While there are so many benefits to a reverse mortgage, the main “cost” is that the

growing loan balance decreases your equity over time. As such, there are a few

situations when a reverse mortgage would not be a good idea…

- If you plan to sell your home in the near-term

- If you want to pass on the home itself as an inheritance to be kept in the family

(rather than passing on the equity in the home)

How might a reverse mortgage benefit you? Reach out any time and I would be

happy to help you assess the specifics of your own financial situation.

How much cash is required to purchase a home with a reverse mortgage?

Let's use Mike Salza's current listing on 1591 Landon Court in Windsor as an example. For more about this beautiful 4 bedroom, 3 bathroom home click HERE!

USING A REVERSE MORTGAGE TO PURCHASE 1591 LANDON CT

 

The percentage of this home’s value that can be financed with a reverse mortgage is called the “principal limit” (PL), and that percentage varies (increases) with age. This is what dictates the amount of money you would need to bring to the closing table when making the purchase. Here are some examples^* of what the numbers look like to purchase this wonderful $875,000 home based upon your age…

 

Age 65 – PL is 34% - Required cash to close is $610,000

Age 70 – PL is 38% - Required cash to close is $577,000

Age 75 – PL is 41% - Required cash to close is $551,000

Age 80 – PL is 45% - Required cash to close is $511,000

Age 85 – PL is 52% - Required cash to close is $454,000

 

^*  These are rough estimates. Reach out for a more detailed look at the numbers for your specific financial situation.

Reach out with your questions!

Jason McConahy

Loan Officer | NMLS # 2272441 | Licensed in CO, WY, KS

FAIRWAY INDEPENDENT MORTGAGE CORPORATION

Phone: 970.689.9352

Email: Jason.mcconahy@fairwaymc.com