Here you will find answers to some common questions from people when considering a reverse mortgage.
Yes YOU can! A HECM (Home Equity Conversion Mortgage) reverse mortgage for Purchase or HomeSafe for Purchase, FARs proprietary reverse mortgage for purchase, are tools that allow borrowers to purchase a new home with a reverse mortgage loan. The process is similar in some ways to using a forward mortgage to purchase a new home. The borrower still needs to work with a real estate agent on the transaction, and many of the same closing costs and timeframes apply.
Older homeowners often find themselves wanting (or needing) to RELOCATE to be closer to family members, DOWNSIZE to a more manageable home, or even UPSIZE to a retirement dream home on the beach, golf course, or active adult community. The reverse mortgage for purchase tool can be an ideal solution for accomplishing your retirement relocation goals.
With a HECM or HomeSafe, your new home down payment is typically between 45% and 62% of the purchase price, depending on your age or your eligible non-borrowing spouse’s age, if applicable.
The rest of the funds for the purchase come from the HECM or HomeSafe loan. This allows you to keep more assets to use as you wish, as compared to paying the down payment with cash, while still having no required monthly mortgage payments.
The down payment for your home can come from a number of sources, just like any time you buy a home. The cash you bring to purchase the property may be from the proceeds of the sale of your previous home, or it may be from your savings. It could also be a combination of the two.
A reverse mortgage may help you maintain a quality standard of living throughout your retirement years. Because a reverse mortgage is a tough decision that may affect other family members, we encourage you to involve them in your decision process.
When the home is sold or is no longer your primary residence, it’s time to repay the loan. After the loan is paid off, any remaining equity belongs to you or your estate and can be transferred to heirs.
It is important to remember that the property will likely continue to appreciate and the value of the home will grow, which would offset the increase in the mortgage balance. A quick example of this would be assuming an appreciation rate* of 4% and a mortgage rate of 7% plus mortgage insurance:
Beginning 1 year 2 years
Home Value $1,000,000 $1,040,000 $1,081,600
Mortgage balance $437,000 $465,155 $496,124
Equity $563,000 $574,845 $585,476
*Since 1991, the average annual home price increase has been 4.3%, according to the FHFA. Since 2000, the average rate has been 4.7%. And since 2012, the average rate has been 7.7%. Courtesy of Credit Karma 4/2022
There are several requirements to maintain a reverse mortgage agreement. Aside from maintaining the home in a state of good repair, there are two additional stipulations:
- The home must be your principal residence
- You must stay up-to-date on all property charges such as property tax and homeowners insurance
To qualify for a reverse mortgage, you will have to have a significant amount of equity built-up in the home. There is no specific amount of equity needed and you can get a reverse mortgage even if you have an existing mortgage. The proceeds from the reverse will pay it off and the balance is incorporate into the amount borrowed. As a rule of thumb, you should have 50% equity or more in your home for a reverse mortgage. This is because you must use the reverse mortgage proceeds to pay off your existing home loan first. If you own less than 50%, the proceeds of your reverse mortgage won’t cover that gap.
Up-front costs may include a property appraisal fee, origination fee, closing costs, mortgage insurance premium, a modest charge for HECM counseling (if applicable), and a servicing fee. You can roll most of the up-front costs into the loan to minimize out-of-pocket expenses. While closing costs vary based upon the type and size of the loan, they’re similar to those for any traditional mortgage. During the life of the loan, interest and a monthly insurance premium accrue. An FAR Reverse Mortgage Specialist will give you a detailed breakdown of the up-front costs and loan expenses.
You do not have to make principal and interest payments as long as the home remains your primary residence. As long as you meet the loan terms, you do not have to repay a reverse mortgage until the home is sold or the last surviving borrower (or a non-borrowing spouse who meets certain requirements) no longer lives in the home as their primary residence.
No. Just like a traditional mortgage, as long as you continue to meet the loan terms, such as staying current on property taxes, homeowners insurance, and property charges, you retain full ownership. You can sell the home at any time.
