With rising property values many baby boomers have a lot of equity in their homes. If you are over 62 years old, you can use a reverse mortgage to take advantage of all that equity when you buy a new house.
A reverse mortgage doubles your home buying power, it eliminates monthly mortgage payments, and leaves you with extra cash to travel and enjoy life.
Sounds too good to be true?
Keep reading …
How a Reverse Mortgage Works
Let’s say you have 50% equity in your home and the other 50% is a bank loan. With a reverse mortgage you can use your equity to cover the monthly payments on your loan.
This means your equity gets smaller every month; however, you have no monthly mortgage payments.
So, what happens when you run out of equity?
That’s where the Federal Government comes in.
Reverse mortgages are insured by the Feds. They are FHA loans, also known as Home Equity Conversion Mortgages (HECM). As long as that home is your primary residence you don’t have to make any payments for life.
If your loan is “under water” when you die, your estate is not responsible for any losses to the lender.
That’s why a reverse mortgage may be perfect to supplement your retirement income. The longer you live the bigger the benefit for you and your estate.
Should You Buy with a Reverse Mortgage?
Let’s say you net $300,000 when you sell your current home. You have 3 options for the new purchase:
- Buy a $300,000 home all cash. You own your new home 100%. There are no monthly payments. However, your new home will likely be smaller than the one you just sold.
- Buy a $550,000 home with a mortgage. If you pay $100,000 down and take a $450,000 loan your monthly payments will be around $2,000. You still have $200,000 to invest or spend as you like.
- Buy a $550,000 home with a HECM. You pay $300,000 down, but you won’t incur any monthly payments for as long as you live in the home.
Which Option is Right for You?
With option 1 you are downsizing to a smaller home with no monthly payments.
With option 2 you incur $24,000 per year in mortgage payments. If you live for another 20 years this adds $480,000 in expenses. However, you have an extra $200,000 to invest or spend. When you die your heirs will inherit a home with lots of equity.
With the HECM you can buy a larger home with no monthly payments. After 20 years you saved $480,000. When you die your heirs may still have a little equity in the house. If not, they don’t owe a penny to the government.
For more information on HECMs and a down payment table click here.
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