Reverse mortgage imitation available for people aged 55 and over – Press Telegram
After soaring for four straight months, the average rate on a 30-year fixed-rate mortgage hit 5% last week – the highest rate in more than a decade.
In addition, wholesale prices jumped 11.2% in March. Groceries, gas and medical issues are just the tip of the iceberg of overall affordability.
It doesn’t take a rocket scientist to figure out that these headwinds will turn home prices around.
What should owners do before retirement? How do they maintain their overall net worth and adapt to inflationary financial pressures? To sell? What about the incredible capital gains tax one might pay? And where to go?
Perhaps the answer for those 55 and older is to dip into their safe deposit box to pay lingering bills and make necessary repairs before house prices take a real plunge.
But what type of mortgage is best for doing this? Easily eligible FHA reverse mortgages are a no-start unless you are at least 62 years old. Interest-only mortgages last a maximum of 10 years before principal and interest payments come into effect. Can you say payment shock?
A good solution for some might be an attractive hybrid mortgage that takes baby steps towards a reverse mortgage.
It’s available to people age 55 and older who want to modify their mortgage, refinance in cash, or get a new loan for the purchase.
The monthly cost is much lower than a regular mortgage payment or even an interest-only mortgage payment. The main difference between this and a similar mortgage product I wrote about in 2020 is that the minimum age has been raised from 60 to 55.
The borrower must make a partial interest payment for the first 10 years. The mortgage balance increases like a reverse mortgage — classic negative amortization. But then, no more house payments and no more obligations to the mortgage agent as long as you stay in your house.
If you move, refinance or die, the mortgage will have to be paid off.
You will still be responsible for maintaining your home, paying your property taxes, home insurance, and all HOA fees.
Your required minimum payment – excluding taxes, insurance, and HOA fees – is approximately 30% of the full payment in an illustration I reviewed. The remaining balance grew from $497,250 to over $750,000 after the first ten years of payments. Again, classic negative damping. More payments though.
Suppose a 55-year-old borrower takes out a mortgage and lives in the house until he turns 90. Assume the property is worth significantly less than what is owed on the original principal balance and accrued interest and the property is under water.
Since this is a “non-recourse loan”, the mortgage agent could not go after the owner’s estate to make up the difference between the value of the house and the amount owed. The heirs will still have the option of repaying the lien if they wish to keep the house.
This is based on an actuary’s table for the youngest borrower, who must be at least 55 years old. The older you are, the less equity you need. Assuming the youngest borrower is 55, the down payment or equity will need to be at least 60% for the math to work, or $1.2 million for a $2 million home.
Other key points include:
- Borrowers must have a minimum average FICO score of 680.
- Borrowers must have qualifying income.
- Borrowers must attend a mortgage counseling course.
- Loans are available up to $4 million
- Loans are available for houses, condos and buildings with up to four units.
- To refinance, borrowers must have 10 or more years remaining on their existing mortgage.
- There is no FHA mortgage insurance because it is not a Federal Housing Administration loan.
Keep in mind that nothing is free.
Even though this mortgage instrument does not carry expensive FHA mortgage insurance, much like the FHA reverse mortgage, there can be huge closing costs.
Freddie Mac rates the news: The 30-year fixed rate averaged 5%, 28 basis points higher than last week and the highest rate since February 17, 2011. The 15-year fixed rate averaged 4.17%, 26 basis points higher than last week and the highest rate since February 24, 2011.
The Mortgage Bankers Association reported a 1.3% drop in mortgage application volume from the previous week.
At the end of the line : Assuming a borrower gets the average 30-year fixed rate on a conforming loan of $647,200, last year’s payment was a whopping $731 less than this week’s payment of $3,474.
What I see: Locally, well-qualified borrowers can obtain the following fixed rate mortgages without points: A 30-year FHA at 4.375%, a 15-year conventional at 4.125%, a 30-year conventional at 5%, a -balance (647 $201 to $970,800) at 4.875%, a 30-year conventional high balance at 5.375%, and a 30-year buy jumbo at 4.625%.
Eye-Catching Loan of the Week: A 30-year adjustable mortgage, locked in for the first five years at 3.625% with 1 point.
Jeff Lazerson is a mortgage broker. He can be reached at 949-334-2424 or [email protected] His website is www.mortgagegrader.com.