Save with a ‘Reverse for Purchase’

“We want to retire, but if we do, we can’t afford to have housing payments. What’s a possible solution to our dilemma?”

Consider downsizing: moving into a smaller home with upgraded appliances, amenities that you’ll need as you age, and no principal and interest payments, by utilizing a Reverse Mortgage for Purchase.

Say you’re 68 years old and your spouse is 69 years of age. The value of your home is $400,000, and your mortgage balance is $150,000. You sell your current home and after expenses (8 percent) you net $368,000. You pay off your mortgage balance of $150,000 and have $218,000 to put toward your newhome.

Remember, your objective is no principal and interest payments. So, you can pay cash for a newhomewith a sales price of $218,000. You could also use the the $218,000 for a large down-payment on a new home with a sale price of $300,000, and have small principal and interest payments, but this does not meet your goal of full financial flexibility in retirement. Your third option is using a Reverse Mortgage for Purchase that is based on the value of the new home and the age of the youngest borrower in title.

Let’s reviewwhat you qualify for. The new home has a purchase price of $400,000 and the youngest borrower on title is 68. The factors we use to calculate your new reverse mortgage come from the U.S. Housing & Urban Development Department (HUD). We multiply the value of $400,000 times a factor of 47.4 percent and your new mortgage is $189,600. The factors are standardized nationally by HUD.

Your down payment will be approximately $210,000. With the new reverse mortgage, you’ll have no principal and interest payments and you’ll continue to make payments for property tax and homeowner insurance. You will also maintain the home.

The Reverse for Purchase allows you to double your buying power. People who normally will not qualify for conventional financing may qualify for a reverse mortgage. Regular mortgage financing requires that you meet ratios of income to housing expense, and income to total debt. Reverse mortgages only look at a residual income after expenses.

Another option to consider is not using your entire $218,000 that you netted from the sale of your home. If you found a home with a purchase price of $300,000, you could put $142,200 down. That leaves you $75,800 minus other expenses. This also meets your objective of a new home, new appliances, amenities that will help you age in place, and, most importantly, no principal and interest payment for the rest of your life. Sounds like a plan!

Dirk Gray is a reverse-mortgage specialist with FrostMortgage. He teaches for the New Mexico Real Estate Commission, First American Title, and Santa Fe Community College. Contact him at 505-930-1953 or dirk_gray@frostmortgage.com.