Some interesting news! In the soon to be released Obama Stimulus Plan, there is a provision which increases the maximum loan amount for a reverse mortgage up to $625,000 through December 2009. That sounds like pretty good stuff for those with bigger homes who want some monthly payment relief.
Just in case you're not familiar with the intricacies of the reverse mortgage, I'll give you the abridged 101 Cliff Note bullet points...
- You (and your spouse if married) must be 62 years of age or older to get a reverse mortgage.
- The reverse mortgage allows you to pull equity out of your home, in the form of cash to you, and you don't have to pay the money back on a monthly basis for as long as you're alive.
- You must continue to have the home which has the reverse mortgage as your primary residence.
- If you currently have a mortgage on your home, you can refinance into a reverse mortgage and pay off your old mortgage.
- You don't have to worry about having income or good credit, it doesn't matter when getting a reverse mortgage.
- The amount of the reverse mortgage depends on the value of your home, your age and your life expectancy.
- The money you take out of your home can be paid to you in lump sums or installment payments.
- Interest accrues on the money you take out of your home.
- You can use a reverse mortgage to purchase a home.
- You still must pay applicable taxes and insurance on your home.
That's probably more than enough to get you started, so let's look at a scenario. You're 65 years old and just retired. You're getting a small pension and social security. Your home is worth $300,000 and you have $100,000 left on your mortgage. You need a little money, maybe $30,000, to refurbish your home and make it a little more comfortable. Your monthly mortgage payment is $925, not including taxes and insurance. The problem is you can make your mortgage payment every month, but it's choking you financially. You hardly have any money left over at the end of the month to enjoy your retirement. You want to refinance and take money our of your home to spruce up your home, but starting over with another 30 year mortgage doesn't sound too delectable to you. Aside from that, you really can't afford it anyway. What do you do?
Well, this scenario may be tailor made for a reverse mortgage. You can get a reverse mortgage to pay off the $100,000 you have left on your current mortgage and take out $30,000 in cash. If you add on closing costs you may have a new reverse mortgage of approximately $135,000 to $140,000. The beauty is you don't have to make any monthly mortgage payments for as long as your home remains your primary residence. What you've done is put $30,000 in your pocket to use at your pleasure and you've eliminated the $925 monthly mortgage payment you previously had. What a deal!
Is there a downside? Yes and no. Yes, if you think about the fact that interest is accruing on the $140,000. That means if you sell your home 3 years from now, the loan could be maybe $155,000 (just as an example, depending on your interest rate). If it bothers you that your mortgage balance is increasing instead of decreasing, that can be an issue. Also, you may feel as though you're locked into your home because it must remain your primary residence for you to retain the right to not have any monthly mortgage payments. On the contrary, there is no downside if you don't care that interest is accruing on the $140,000 and you don't intend on moving, especially since you're livin' the high life because your cash flow has increased by $925 per month.
Of course, every scenario is different and it's best to speak to a professional and get all the facts. Feel free to contact me at any time.
Kirk Charles, 973-919-8065
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