Should I consider a reverse mortgage for our retirement home?
By Karin Price Mueller | NJMoneyHelp.com for NJ.com
Q. My wife and I are looking to purchase a condo which would be our retirement home. We would be selling the home we live in now, which unfortunately still has a considerable mortgage balance — not so much equity. Is a reverse mortgage something we could use here? Pros and cons?
A. There’s a lot to take in to make sure you understand how a reverse mortgage could work.
As you know, with a traditional mortgage, a bank lends you money to buy your home. You repay the loan by making monthly payments for 10, 20 or 30 years.
In a reverse mortgage, the bank lends you money against the equity in your home, said Bernie Kiely, a certified financial planner and certified public accountant with Kiely Capital Management in Morristown.
“Since the funds are the proceeds from a loan, it is not income subject to state or federal income tax,” he said. “As with a traditional mortgage, the loan is subject to interest.”
The big difference between a traditional mortgage and a reverse mortgage is there are no monthly repayments with a reverse mortgage, Keily said.
“Since there is interest accruing and no monthly payments, your mortgage balance grows a little every month,” he said. “With a reverse mortgage, all persons on the deed must be at least 62 years old. If one co-owner is 62 and the other is not, the younger person must agree to have their name removed from the deed.”
There are four parts to a reverse mortgage, Kiely said.1. The equity you have or will have in your home2. Your life expectancy3. The market value of your home4. Prevailing interest rates
He recommends you sit down and have a conversation with a banker that deals with reverse mortgages.
The equity you will have in your new home is the cash you will be able to put down on the purchase of your new home, he said.
“The banker will use a mortality table to calculate your life expectancy. By referring to current interest rates, the banker will be able to calculate how much the bank would be willing to lend you in a reverse mortgage,” he said. “The bank’s loan plus the cash you have available to put down will determine the value of the house you can finance with a reverse mortgage for purchase.”
If you buy the new home before selling the old home, you will not have the cash available to put down on your new home, Kiely said. You should discuss getting a short-term bridge loan from either your reverse mortgage banker or another banker, he said.
“The pros of a reverse mortgage are no monthly payments. This can really help your cash flow in retirement,” he said. “The cons are you probably won’t be passing your condo onto your kids.”
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Karin Price Mueller writes the Bamboozled column for NJ Advance Media and is the founder of NJMoneyHelp.com. Follow NJMoneyHelp on Twitter @NJMoneyHelp. Find NJMoneyHelp on Facebook. Sign up for NJMoneyHelp.com’s weekly e-newsletter.