Several years ago, we always told clients to just say “no” to reverse mortgages. Back then, they were a very expensive product. That was then, but things changed about three years ago. Today, loan costs on a reverse mortgage are virtually the same compared to a traditional mortgage.
Here's a mortgage strategy one of our clients used that saved them over $15,000 in loan and closing costs.
These folks wanted to sell their existing home and buy a new one which would cost almost twice as much as what they would be selling their previous home for. They own their current home free and clear and were thinking they would use the sales proceeds as a large down payment on the new home and get a traditional 30-year fixed rate mortgage to cover the balance.
We had our mortgage experts show them two different scenarios; one using a traditional 30-year fixed rate mortgage and the other using a reverse mortgage, one where they wouldn't have to make any monthly payments, but the loan principal would go up instead of down over the life of the loan.
Assuming normal appreciation rates on the home, they discovered their net worth would increase significantly more utilizing a reverse mortgage. This is because their monthly living expenses would go down by not having to make monthly mortgage payments which allowed the rest of their retirement nest egg to grow and take advantage of compound interest.
How did they save over $15,000 in loan costs?
Instead of selling their home using the sales proceeds as a down payment on the new home and getting a reverse mortgage for the balance, they obtained a reverse mortgage on their current home. They used those proceeds as a down payment for the home they purchased, and initially got a traditional loan for their new home.
Once their old home sold, they paid off that reverse mortgage and added the additional sales proceeds to pay down their traditional mortgage on their new home. Then, they refinanced the traditional mortgage on their new home into a reverse mortgage.
What they discovered is that reverse mortgage lenders are allowed to waive many of the closing fees if funds are used for refinancing, but they are not allowed to waive many of the fees for a traditional purchase. The strategy we just outlined allowed them to take advantage of the lower refinancing costs.
Is a reverse mortgage right for everyone? Probably not. The only way to figure out if a reverse mortgage makes sense for you is to run the numbers and focus on total net worth, not just equity in your home.
If you live in Florida and would like an introduction to the reverse mortgage experts we recommend to all of our clients, feel free to give us a call at 407-647-7006 or send us an email at firstname.lastname@example.org.