August 3, 2009

10 Reasons Why I think Using a Reverse Mortgage to Purchase a Dan Dolan Town Home is a Good Idea.

danBy Dan Dolan
Dan Dolan Homes

What is a reverse mortgage?

This form of mortgage has been available since the late 1960s. But until January of 2009 it could only be used to access the equity in your existing home. Now it can be used to buy a new home.

How it works.

  1. All the participants signing the mortgage application must be 62 or older.
  2. The buyer(s) select the Dan Dolan home of their choice.
  3. Generally the buyers of a new home will sell their existing home and use the proceeds to make the one-time required down payment on the new home. Any funds left over from the sale of the existing home after the down payment is made can be applied to savings, the purchase of an annuity or even distributed to heirs.

The one-time down payment will be based on the age of the younger mortgage applicant—could be either the wife or husband—and the prevailing interest rate at the time the loan is issued. Your Dan Dolan Homes agent will be able to determine the approximate range of your down payment for planning purposes. Your mortgage loan officer will determine the exact rate.

Pending developments:

Historically, Reverse Mortgages were subject to variable interest rates based on government treasuries. The mortgage rates could go up or down during the period of the loan. While this in no way affected the monthly payments—there are none—it could raise or lower the final mortgage payout balance.

Enter the fixed rate Reverse Mortgage.

Local financial institutions engaged in Reverse Mortgage programs are currently exploring the feasibility of providing fixed-rate reverse mortgages. This means homeowners will now be able to forecast their annual mortgage costs and balances . As was the case previously, mortgagees will not be responsible for any possible cash deficiencies when the property is eventually sold. But according to one industry source, American homeowners tend to be more comfortable with traditional fixed-rate mortgages, and this now brings this preferred option to Reverse Mortgages for Purchase.

  1. At the time of closing you make your one-time down payment and your bank issues the reverse mortgage for the difference between your down payment and the cost of the home. Closing costs are rolled into the mortgage balance.
  2. You and/or your spouse (if any) live in the home for as long as you wish. You make no further monthly mortgage payments ever, regardless how long you live in the home.
  3. Since you own the home you pay real estate taxes, homeowners insurance and the $65 monthly association dues. We estimate these total expenses will be about $400/month depending on the price of home purchased.
  4. When the final occupant vacates the home, the estate sells the home and uses the proceeds to pay off the mortgage.
    • If there are funds left over from the sale after the mortgage is settled, the remaining funds go to the estate.
    • If there are no funds remaining and/or there are not enough funds to cover the entire mortgage balance, the estate has no liability for any deficit.
    • An “insurance policy” included in the mortgage agreement and purchased by the lender at the time of closing, is used to liquidate the balance, if any. Neither the lender nor the survivors’ estate loses anything.
  5. For planning purposes, a buyer age 62 would require a down payment of about 50% of the purchase price of the new home at time of closing. A buyer age 75 would pay about 40% of the purchase price.
  6. The down payment can be viewed as the buyer’s maximum cost exposure of living in the home for the entire duration of their occupancy.This is a major advantage over the typical monthly rental of about $3,000 at an independent living facility and where the costs could addup to $100,000 or more for their stay there.
  7. Finally, a Reverse Mortgage insures that the family or estate will not be burdened with a final unpaid bill for living expenses.

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