Using a Reverse Mortgage to Purchase a Home

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Reverse mortgages once had something of a dubious reputation. Sort of a too-good-to be true, smoke and mirrors scheme with trap doors for unsuspecting seniors. Now they’re insured by the Federal Government and well-regulated to protect borrowers. They even have a new name: Home Equity Conversion Mortgages, aka: HECM’s.

Most of us think of them as a means to tap the equity we may have in our existing homes for additional retirement income and let the kids fend for themselves a bit more when we kick the bucket. There’s that “bucket list” to check off, after all. That is a legitimate use of the HECM, and increasing popular. But, now comes a new wrinkle: using them to facilitate the purchase a home. It’s well worth considering the advantages if you’re 62 or older.

As I understand it, if you were to net $250,000 from the sale of your home back in Illinois, for example, you could use that as the downpayment on a $600,000 primary residence in Sedona – and have no monthly payments with a HECM. The loan balance and accrued interest become due when the last surviving borrower no longer resides in the home (or on the planet). Even then, the heirs still own the home and all remaining equity – not the lender. That’s a major plus, assuming that the home increases significantly in value (and therefore in equity) over the long term.

A nice side benefit is that underwriting the loan is relatively quick and easy. According to my sources, there are limited or no income and credit score requirements. Federal regulations do require extensive counseling of prospective HECM borrowers, however, and that does take time.

Obviously there’s a lot more detail and fine print involved that this broad brush account can’t cover, so clearly you’d want to speak with an expert. Start with your real estate professional, he or she should be able to direct you to one of the reputable lending companies who handle HECM’s.

Meanwhile, speaking of value appreciation, here’s a quick update of the Sedona real estate market as summer winds down: Sales of Single Family Residences are down about 10% from this time last year, but momentum seems to be building for a stronger autumn showing. Prices, however, are up about 6% so far – about $414,000 at the beginning of August. And, we have about 17% more inventory than we did in 2013. The big news is the continued disappearing act of distressed properties. Five percent of the homes sold in 2014 were REO’s or short-sales and only 1% of the inventory is in that category.

Sales of homes over a million dollars are off last year’s mark by about 28% and their Average Price per Square Foot is down 9% to $305. That makes luxury homes the bargain sector at the moment. Vacant land figures continue to be relatively robust with 11% more sales this year and a Median Recorded Selling Price increase of 19% to over $160,000. All-in-all, a healthy market with something positive for buyers and sellers.

 

Dr. Roy Eleutherios Grimm is the Head of the Buyer’s Broker Group and a member of the Pennington-Grimm Team at Russ Lyon Sotheby’s International Realty. For questions or comments email Roy at Roy@SedonaRealEstate.com or visit www.SedonaRealEstate.com for the full statistical details.

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