The other day, a client came into my office and asked me about a using a reverse mortgage to purchase a property. They said they had heard some negative things from relatives but had recently seen articles that painted a very different picture. They asked for my opinion. I told them that it is critically important to hire a trusted mortgage advisor. We set about to get the facts and become educated on using a reverse mortgage for purchase.
We made contact with Reverse Mortgage Planner Kent Montavon from Fairway Independent Mortgage Corporation. He and his business partner Bill Niehus help buyers and homeowners exclusively with reverse mortgages. They arrange reverse mortgages that are called Home Equity Conversion Mortgages (HECM). It turns out that, for folks over 62 years of age, reverse mortgages could become a “go to” product for purchasing or refinancing a home. Here is what I learned:
- NEW RETIREMENT LANDSCAPE – Years ago, people retired with pensions and CD interest rates were much higher. Housing values did not fluctuate as much. Some advise it can be risky to tie up all your cash in just one investment, i.e., your home.
- SIMPLE EQUITY CONVERSION TOOL – an HECM reverse mortgage is a loan that one can obtain at 62 years of age and not need to make a payment (unless you want to for tax purposes) for as long as you are in the home full time. One still must pay property taxes, HOA fees, and insurance just like you would if you owned your home free and clear. According to Kent, a senior needs to put down (based on age) between ~20% to 50% of the purchase price or value of the home to qualify. There are also income and credit requirements. From what I learned, someone who is 62 could upsize or downsize into their dream home. Kent gave me an example of someone who is 62 who wanted to purchase a home for $500,000. They would need to bring ~$250,000 down payment to the closing table and Fairway would lend the remaining amount as a HECM for the purchase. If someone already owned a home and wanted to stay there, they could get a reverse mortgage that would either pay off their existing mortgage or give them a credit line OR a monthly payment for life or as long as they lived in their home.
- MY RESERVATIONS – I had some hard questions for Kent because I keep my clients’ interests foremost in any transaction. The old adage, “if something sounds too good to be true, it likely is.” We know that, despite the dramatic increase in home values over the last few years, things were going the other way back in 2008. Here are some of my “what ifs”: What if interest rates go up and home values go down, and what if my client passes away owing more on the home than what it will sell for? Kent explained that HECM loans are “non-recourse” and owed by the home— not the borrower or the estate. In other words, if they go upside down, the FHA mortgage insurance fund gets the bill, not the borrower or the heirs. If the borrower is still alive during a market down turn, they can stay in the home regardless of the underlying value. All of their cash is theirs to invest and use as they wish, nothing goes to the payoff of the home except the eventual sale proceeds. However, if values continue to rise and there is equity in the home, the extra equity goes to the heirs after the loan is paid off with interest. I asked Kent, what happens if my clients live to be over 100 as many people are now living longer. I found out that Fairway offers HECM loans and all of them are FHA lifetime commitments. The borrower can move and pay the loan off whenever they want, however, the reverse is guaranteed for as long as the borrower lives in the home.
The reverse mortgage will be paid back within 12 months of the last borrower moving out of the home, with home equity from the sale of the home. Based on research by the financial planning community, borrowers who use reverse mortgages usually end up with a higher net worth. Kent mentioned a financial advisor would not tell a client to put all of their nest egg into one stock, yet, often we Realtors® see our clients pay cash for a home, or pay off their mortgage as fast as possible. This may well serve certain individuals; however, it is prudent to run the financial analysis to determine if this is right for you.
- NEW RESEARCH. Kent provided me with reams of research and articles recently written about HECMs and financial planning. I would be happy to share this research with anyone reading this article. There are 4 common themes:
- Cash flow goes up because of no monthly mortgage payment
- The longevity of the borrowers portfolio goes up because the borrower has more cash;
- Income taxes tend to go down because reverse mortgage payments to borrowers are not taxable.
- Net worth and legacy to heirs tend to go up.
If you are over 62 and contemplating a home purchase, I would encourage you to speak with Kent to find out if this loan is right for you. Also, if you are over 62 and have already purchased a home, you may want to consult with Kent to find out what your options are as the HECM loan could make your retirement better with more cashflow.
Kent has numerous informational seminars scheduled in Evergreen and Metro Denver and is available for a no obligation consultation as well. He can be reached at kentm@FairwayMC.com or 720-495-9594. As always, you can reach me via my cell at 303-907-7668 or via email at Jon@AlarisProperties.com. I am here to assist you in whatever way I can.