11/3/11: Reverse mortgages can be good option for seniors
By: Benny L. Kass
Do you know that if you are 62 years or older you may be able to buy a house or a condominium using a reverse mortgage? A reverse mortgage allows you to get money from a lender, but you do not have to pay it back (or make any monthly payments) until you sell or die.
How does it work? Let’s assume you just sold your existing house and want to downsize to a smaller house or a condominium unit. You have $300,000 cash from the sale, and since you qualified for the up-to-$500,000 exclusion of gain, you will not have to pay any capital gains tax.
Your new property will cost approximately $300,000. You are retired and do not have a current, steady stream of income other than your modest retirement fund. You might be able to get a traditional mortgage but you will probably have to come up with a large deposit – maybe as high as 30 percent of the sale price.
This will significantly drain your finances and affect your current lifestyle. What about a reverse mortgage?
You should consider the FHA Home Equity Conversion Mortgage, which is the only federally insured reverse mortgage available.
To qualify, you must be at least 62; if you are buying with a spouse, both of you must meet the age requirement. The house you buy must be your principal residence and you must certify that you will live in the house within 60 days of obtaining the loan. Although single-family residences and properties with two to four units are eligible, cooperative housing is not. And if you are considering buying a condominium unit, make sure that the entire condominium association is FHA-certified. (See my column from Oct. 22.)
You (and your spouse, if applicable) will be required to meet with an approved credit counselor because there are significant legal and financial implications to such a mortgage. If you plan to leave your house to your children, for example, a reverse mortgage may leave little or no equity should you live a long time. Additionally, there are costs involved in such a transaction, although in many instances, they can be included in the amount of the loan. A counseling certificate must be submitted to the lender before closing.
You must use your own cash for the difference between the amount of the reverse mortgage and the sale price. Sellers can pay such costs as transfer tax, real estate commission, title search and other fees typically paid by a seller, but seller credits or set-asides for repairs will not be permitted.
How much will you be able to get by way of the reverse mortgage? That depends on a number of factors, primarily the age of the youngest borrower, the interest rate, the ZIP code and the lower of the actual sales price or the appraisal. Why ZIP code? Because there is a maximum claim amount, which is linked to the FHA loan limit on single-family dwellings. That limit varies by state, county and even city. For example, in the District of Columbia, Arlington, Alexandria, Bethesda and Gaithersburg, the current limit is $625,500. In other areas, it ranges from $271,050 to $494,500.
Several online sites have very helpful loan calculators that will assist you in determining how much money you will need. I took our example, and plugged in a D.C. ZIP code and the ages of husband and wife in the mid-70s. According to the calculator, I was able to get a reverse loan of $198,187 for a standard, fixed-rate reverse mortgage. That means I will need a little over $100,000 to buy that $300,000 property.
Is a reverse more favorable than a regular mortgage? Yes, for two reasons: First, I will still have almost $200,000 left from the earlier sales proceeds. But more important, I will not have to make any mortgage payments. The bulk of a regular mortgage payment is the portion that goes to interest. For example, if I were to get a 30-year fixed loan for $200,000 at 4.25 per cent, my monthly payment would be $975 – money I am saving with the new reverse loan.
When does the loan come due? When you move out or die. At that time, you or your estate will either have to pay off the then outstanding mortgage – which will be much higher than the original loan, since interest will be added yearly – or sell the property. But one thing is clear: Neither you nor your heirs will ever have to pay more than the value of the house; that’s what FHA guarantees, since it has to pay any excess.
A reverse mortgage has many merits, but there are also many negatives. Educate yourself carefully; this may be the most expensive project you ever do.
Benny L. Kass is a Washington lawyer. This column is not legal advice and should not be acted upon without obtaining your own legal counsel. For a free copy of the booklet “A Guide to Settlement on Your New Home,” send a self-addressed stamped envelope to Benny L. Kass, 1050 17th St. NW, Suite 1100, Washington, D.C. 20036.
Readers may also send questions to him at that address or contact him through his Web site, www.kmklawyers.com.