John (age 70) and his wife Mary (age 53) have a home valued at $750,000 and have an existing balance of $80,000. John gets a reverse mortgage in the amount of $415,000 as a line of credit. 80k is used to pay off the old loan and John takes another 75k at closing to pay off the family car and other debt. They now owe approximately 155K on the line of credit. The new required monthly payment on the 155K is ZERO. The borrower is only required to pay their taxes and insurance. The other unused portion of the line of credit ($260,000) remains as available funds for John to tap into later. If he does access this additional money later, the monthly required payment is still ZERO. While he can make payments if he wants to, he is not required to make any reverse mortgage debt service payments.
Now let’s look at what happens a few years down the road. John is 77 and has unfortunately passed away. His wife Mary was too young to be on the loan at the time the loan was taken out, so the unused or un-accessed portion of the line of credit will be frozen upon John’s death; however, she is not required to make monthly payments and will continue to have occupancy rights (the right to live in the home) for the rest of her live, as long as the property taxes and home owner’s insurance are paid and she continues to take good care of the property.
Mike (age 66) and his wife Susan (age 65) have a home valued at $650,000 that is paid off and free on any other liens. Mike and Susan take out a reverse mortgage as a line of credit in the amount of $320,000. The borrowers were fairly well funded and had other investment assets, so they chose to only take out 50k at closing to pay for the remodel of their kitchen and bathroom. The remaining 270K was not used anytime soon and viewed more as a tax free rainy day fund (since the line of credit never expires so long as the home is still the primary residence). To Mike and Susan’s surprise, one of the benefits of the FHA insured reverse mortgage is the unused portion of the line of credit will increased every year as the borrowers get older. This means more and more equity is made available to the borrower simply because they got older; the increase or decrease in home’s value has nothing to do with this increase in the line of credit. In Mike and Susan’s case, their unused line of credit of 270K increased by nearly $10,000 in the first year to almost 280K. Mike and Susan took out the extra $10,000 and used it to pay for an Alaskan cruise, and the available line of credit was still at 270K. This ongoing increase in the line of credit has enabled Mike and Susan to access funds for an annual vacation every year, and still keep the 270K available as on ongoing emergency fund.
Jose (age 64) and Carissa (age 63) have a home valued at 550K and have worked hard to pay off their home, but still owe $60,000. They planned on working for three more years and then retiring with the home paid off so their kids can inherit the home free and clear when they die. The problem is Jose’s back pain can no longer handle the work he does. The solution is an FHA insured reverse mortgage taken as a line of credit for $275,000 that pays off the existing 60K. Now they can continue to make payments of they choose, but no longer have the pressure of an ongoing mortgage payment. This flexibility means that Jose can find less strenuous work or even retire early. But there is one problem, what about the kids? Jose and Carissa want the heirs to inherit a nest egg upon their death. Solution: With the reverse mortgage, Jose and Carissa large portions of the line of credit can be tapped into by Jose and Carissa and that money can be gifted to their children now while Jose and Carissa are still alive. They can help their kids buy their own homes, give money to the grand kids for college, buy them a car, or whatever. The point is that Jose and Carissa can give now while they are still alive and see the joy they create and even have control on how their kids use the money, and when they do eventually pass away, the heirs will still likely have a large portion of equity in the home to inherit.
*note that in some cases the amount that can be drawn off of the line of credit may be limited during the first 12 months. After 12 months, the restrictions would not exist.
With the FHA insured reverse mortgage taken as a line of credit, the interest rate can fluctuate. The interest rate will be based on the index used (typically the average yield on the 30 day Treasury Note) plus the “margin” (the margin is a fixed number that can determined prior to closing. So while the starting interest rate on the line of credit reverse mortgage can be low, some borrower’s prefer a fixed interest rate reverse mortgage. With the fixed interest rate reverse, the rate never changes over the life of the loan and just like the line of credit reverse, there is never a monthly mortgage payment due for as long as the borrowers live in the home as their primary residence. The main difference is that with the fixed rate reverse, it is more of a “one and done” type of transaction in that the borrower takes all the money at one time when the loan closes and funds. The borrower can put the money in the bank or do almost anything they want with it. Naturally, any existing liens against the property would be required to be paid off with the new reverser mortgage. For example, let’s say the fixed rate reverse mortgage in the amount of 390K was on a home with a $90,000 balance; after paying off the 90k and closing costs, the remaining 300K would be deposited into the borrower’s bank account and their new monthly payment would be ZERO.
Beverly (age 73) has lived in the same to story home for thirty years and the stairs were not so bad in the past, but now with her bad knees the stairs have become a real challenge. Beverly’s concern is that if she sellers her home for the expected price of $400,000 that she will only net approximately $380,000 after paying the realtor fees, and the new ranch style home she wants to buy has a price of $500,000. She does not want to get a $120K loan for the difference since she is on a fixed income. The solution: Beverly sells her home and buys the new ranch style home using a reverse mortgage. Her reverse for purchase would cover approximately $260,000 of the 500K price, and she would pay the other 240k as the down payment. Now she owns a 500k ranch style home with ZERO monthly mortgage payment and still has $140,000 cash in the bank (her 380K proceeds minus the 240k down payment).
James (age 62) with a house valued at 600K that is paid off and he wants to retire. James knows that if he takes his social security benefits at age 62 rather than waiting until he is age 70, his benefits will be approximately half as much. He is also concerned that if he retires at age 62 his reduction of income from not working will greatly impact his lifestyle until he finally starts receiving his social security benefits. Solution: James takes out a reverse mortgage as a line of credit in the amount of $290,000. James elects to take $20,000 up front and have the reverse automatically deposit another $1,500 per month directly into his bank account until he reaches the age of 70. At age 70 James will elect to receive full social security benefits rather than half and he will still have a large portion of his reverse line of credit available to tap into as needed.