We learn best from real life examples – we, as people like to see how it has worked out for others and hopefully to learn from them. Below is an example of a client that utilized a Home Equity Conversion Mortgage, or AKA a reverse mortgage to be able to finance his dream home in retirement!

Mike was 64 years old and his wife Mary was 62.  Both were working but wanted to build their final home that they anticipated living the remainder of their lives in.   The current home was to be sold and they would net about $500,000 in net proceeds.  For $500,000 they just couldn’t get what he needed and wanted.  At $750,000 they could.   Mike & Mary had choices:  1) they could put $500,000 down and have a $250,000 mortgage or 2) they could take the extra $2500 from his savings or 3) they could use a Home Equity Conversion Mortgage (also referred to as a reverse mortgage) to complete the transaction.   We discussed his options and they brought the info to their financial planner for her opinion.  

What did Mike & Mary and their financial planner decide was best?  They used the HECM4P (home equity conversion mortgage for purchase).  They invested $450,000 into the new home leaving $50,000 in reserves.  Mortgage payments on the reverse mortgage are optional so they can live in this house for the rest of their lives without having to make a payment!  Of course they must pay the property taxes and keep the home insured and maintained.   

Right now Mike & Mary are both working and earning about $8000/month between the two of them so they have decided to pay the interest and mortgage insurance that would be due on the loan each month.  When they do this, their “reverse” mortgage is not reversing their equity.  Their loan balance remains level if they make a voluntary monthly payment equal to the the interest & mortgage insurance due that month.  But it gets much better: when you make a voluntary payment two things happen: your loan balance does not go up but very payment you make becomes available to you in the form of a line of credit.   

If Mike and Mary buy their new house using a reverse mortgage and make voluntary payments of $900/month while they’re working then they will really see line of credit growth.  For example if 36 voluntary payments were made, they would have created a line of credit of about $32,400 (plus growth).  Growth?  Yes!  The line of credit grows at the same interest rate as the reverse mortgage.  

If at any point Mike or Mary decide to retire and their income declines, they can choose to make smaller payments (and continue to grow the line of credit) or they can decide not to make any payments at all!

If either spouse were to pass away, resulting in a further reduction in income, the surviving spouse could remain in the home until his or her death as long as they were sure to pay their taxes and keep the insurance and maintenance of the home up.