Home Buying in 08757>Question Details

W. Erdmann, Home Buyer in Totowa, NJ

does the expense of taking a rev. mort. for a year or so tobuy a new home make sense.

Asked by W. Erdmann, Totowa, NJ Wed Oct 29, 2008

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Lending answer:

It's difficult to say without knowing personal details of your situation. However, as a general rule, I would advise that a reverse mortgage may not be your best option, and probably the worst option to borrow funds for just a year or so.

First, reverse mortgages come with additional fees not found with other mortgages. Your FHA insurance premium will be 2% of the loan amount. You will also pay a servicing fee to the bank that can run several thousand dollars depending upon the loan amount. Bottom line: reverse mortgages are among the most expensive in closing costs. The shorter the term you hold the reverse mortgage the greater will be the cost of funds you borrowed.

Second, HUD just announced yesterday guidance to lenders on the new reverse mortgage purchase loan. Lenders will soon offer the new loan to customers. Essentially, you may use a reverse mortgage to purchase the home, but you will be required to make a down payment from your own funds (cash on hand or proceeds from the sale of your current home) equal to the difference between the amount of reverse mortgage you would qualify for on the new home and the purchase price. The down payment will be substantial, but if you qualify now for a reverse mortgage, using a reverse mortgage to buy your next home might be a better choice. Again, the costs of a reverse mortgage run significantly higher thana regular foward mortgage.

I recommend speaking with your bank about both options so you may obtain a precise estimate of your maximum claim amount, closing costs, and possibility of using the purchase option. Your bank may also suggest other, lower costs ways to finance your next purchase.

About 20% of the loans I write are reverse mortgages. Generally, I find about 2 out of 3 prospective customers would be better served by something other than a reverse (which means I'm referring them back to their banks). The closing costs (even with my el cheapo fee), negative amortization, and other concerns mean that reverse mortgages aren't for everyone... despite the fact that Robert Wagner is pitching them fast and earnestly on TV with the mansion and Jaguar in the background.

Note: HUD permits banks to charge up to 2% of your home's value as their fee. There is much, much less underwriting work in a reverse mortgage than a forward mortgage. Banks are collecting such enormous fees relative to the amount of work performed that HUD had to revise their rules to cap the fee. If you decide that a reverse mortgage is best for you... negotiate that fee aggressively.

Good luck!
1 vote Thank Flag Link Wed Oct 29, 2008
Great question, hard to answer, here are my thoughts. IF it was my life... At 63 my wife and live debt free in a nice place. If we found a great buy it would not really matter what the up front costs were on the reverse. Thoses costs are higher then normal mortgage costs but if it gets us what we wanted we would do it.
If you keep your home with a reverse on it for a few years, I think it is a win win. Getting cash out now from your present home, and keeping both, for a few years is a great idea. Buying when the market is down seems right, i think it makes up fro the difference in costs up front.
I do not take great risks, at my age i do not want to gamble the future. A reverse is not a gamble, it is a bit costly. Call me if you need to talk about it. I have been a REALTOR since the 60's. 732-778-9933 Good luck and thanks. Marc williams
0 votes Thank Flag Link Wed Oct 29, 2008
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