Friday, September 25, 2009

Senior's Purchase New Homes Make No Payments

Right here in Edmond and all around the nation, Seniors are downsizing to smaller homes making the purchase with a mortgage that requires no monthly payment for the remainder of their lives.

It’s called a Reverse Mortgage and it has become more popular than ever before, especially with Seniors who are selling their larger homes and opting to purchase newer smaller homes to gracefully age in place. This is exactly what Lydia Cross (not her real name) is doing.

I met Lydia just this week after she had spent the better part of three weeks working with a local bank to get financing for a new home. Her existing home was too large and in truth, too opulent for her needs. Five years ago Lydia’s husband passed away and left her in good financial shape. She purchased the larger nicer home to entertain her friends and family. Lydia is 72 and after experiencing significant health problems earlier this year, she’s ready to simplify life.

She put her house on the market and it sold rather quickly. In the meantime Lydia had found another home that better suited her needs and made an offer to purchase which was accepted. About the first of September she signed contracts on both houses and spent the better part of three weeks working with a local bank to get financing. The bank exhausted every avenue to secure the financing Lydia needed and only after visiting with her financial planner was she directed to call our office.

We examined the Reverse Mortgage from every angel and Lydia was convinced that this was not only the only way for her to get the financing she needed, as it turned out, it also helped her maximize cash flow for her remaining years. Here’s how her scenario works.

First Lydia will receive considerable proceeds from the sale of her current home. Because every Reverse Mortgage is custom fitted to each Senior’s needs, she will need to bring $103,000 to closing to cover down payment and closing costs. The purchase price of her new home is $305,000 so her new which leaves her a new loan amount of $202,000.

Her fixed interest rate for the rest of her life is 5.65%, a rate just slightly higher than conventional 30 year rates. If she were to take out conventional financing for this amount at 5.25% her monthly principal and interest payment would be $1,115.45 but with the reverse mortgage, Lydia can live in her new home and never make a monthly payment for as long as she lives. I explained to Lydia that when she passes, her estate has 12 months to settle the mortgage by either selling the home, or securing replacement financing.

But Reverse Mortgages have a few associated costs that can be surprising if they are not anticipated. The first is the up front mortgage insurance fee. A Reverse Mortgage is an FHA loan and as such like all FHA mortgages has a mortgage insurance premium attached to the front of the loan. This fee is calculated as 2 percent of the maximum amount that can be borrowed plus a 0.5 percent annual premium. For Lydia this added $6,100 to her closing costs.

Another sizeable fee is the servicing set aside fee. Each Reverse Mortgage charges either a $30 or a $35 a month service fee. This amount is multiplied by the number of month until the borrower reaches the age of 100. For Lydia this was a total of $4,730. This amount is not added to the closing costs, instead it is set aside out of the equity of the home, and the unused amount is returned to the estate when the note is settled.

Closing costs are the most controversial part of the Reverse Mortgage discussion. For some Seniors it is the sticking point that finally deters them from pursuing the idea any further. For others it is a necessary part to realize the opportunity of living out their years with fewer liabilities and a greater cash flow to better meet their needs. Before making your decision about a Reverse Mortgage, consult your financial planner and a Reverse Mortgage specialist.