October 20, 2013 in Business

Reverse mortgage strategy can open door to second home

Tom Kelly
 

A reverse mortgage must be made against a primary residence, but the loan can absolutely be used to help purchase a second home.

While the proceeds of a reverse mortgage typically help seniors to “age in place” by making their home more comfortable for their retirement years, there are no limitations on how reverse funds can be used.

For example, the Caseys were seeking to lower their monthly mortgage payment on their primary home so that they could afford the monthly payments on a recreational cabin. Instead of cashing other assets, paying the capital gain tax and plunking down the net amount as the cabin’s down payment, the couple took out a reverse mortgage, which accomplished the same goal.

“They wanted to keep their home but were concerned that their monthly obligations would prohibit them from qualifying for another mortgage on a second home,” said John Harding of Axia Home Loans Reverse Mortgage Division. “By refinancing their home with a reverse mortgage, it not only eliminated their mortgage payment but also provided the down payment funds for the cabin. Since there was no longer any monthly payment, it was easier for them to qualify for a mortgage on the cabin.”

Let’s take a look at the numbers:

Primary residence

Value: $600,000

Mortgage: $281,000

Mortgage payment: $2,114 (plus taxes and insurance)

Reverse Mortgage: $433,800

Net proceeds after paying off mortgage plus closing costs: $128,311

Cabin

Purchase price: $215,000

Down payment: $70,000

Funds needed to close: $77,000

Conventional loan: $145,000

Mortgage payment: $811 a month (plus taxes and insurance)

The strategy will enable the Caseys to live in their home with no mortgage payments for the rest of their lives, or until they sell the house. It also reduces their monthly mortgage obligations from $2,114 to $811.

A reverse mortgage is a loan that enables homeowners 62 or older to borrow against the equity in their home, without having to sell the home, give up title or take on new monthly mortgage payments. Loan proceeds can be used for any purpose, and taken out as a lump sum, fixed monthly payments, line of credit or a combination of those options.

The “expected interest rate” is a critical factor that is used to determine how much equity an elderly homeowner is eligible to receive from a HECM. It is calculated by adding a margin to the 10-year U.S. Constant Maturity Treasury rate, published weekly by the Federal Reserve.

The reverse mortgage loan amount depends on the borrower’s age, current interest rates, and the value and, in most cases, the location of the home. A reverse mortgage does not have to be repaid until the borrower moves out of the home permanently, and the repayment amount cannot exceed the value of the home.

Seniors can “outlive” the value of their home without being forced to move. The homeowner cannot be displaced and forced to sell the home to pay off the mortgage, even if the principal balance grows to exceed the value of the property. If the value of the house exceeds what is owed at the time of homeowner’s death, the rest goes to the estate.

A controversial topic has been the “trailing spouse” issue. If the surviving spouse is not included on the reverse note, the surviving non-borrower spouse may not be able pay off the loan balance or qualify for a HECM on their own in order to remain in the property.

The situation usually occurs when an older man marries a younger woman and the woman chooses not to go on the reverse mortgage title. Since the age of the younger spouse dictates potential proceeds, her participation decreases the net amount.

Recently, HUD’s Office of Housing Counseling sent a notice to all HECM-approved counselors encouraging them to take special precautionary measures when meeting with non-borrower spouses so that they fully understand the future repercussions of not being on title to the HECM loan. The notice also recommended that counselors get a signed, individual written statement from a non-borrower spouse acknowledging that he or she may have to leave the property upon the death of the borrower.

That reality takes on additional importance when a second home is involved. A reverse mortgage can be a terrific way to get in the door of a getaway, but if your name is not on the reverse mortgage note, make sure you have a plan in place to keep at least one roof over your head.

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