Let’s talk about reverse mortgage. I read on various forums all the time people making complaints regarding real estate schools and how they just prepare for the test. I explained to someone last week that if you pay attention in these classes, there are hidden treasures uncovered by very few, ways to make money that traditional agents miss every day.
Since the seniors are about to return I thought I would explain a purchase with a reverse mortgage. A reverse mortgage will generally pay between 38-71% of the purchase price of a home for those 62 years and older. The amount typically available to borrow increases with the age of the borrower but is also dependent upon interest rates and mortgage insurance premiums.
It is a common misunderstanding that when the home is vacated (either by the occupant being placed in a home or by death) the home is immediately returned to the lending bank. This is not the case, in fact the note is not due until one year after the surviving spouse vacates the home, thus essentially there is a one-year redemption period for heirs to repay the amount borrowed.
How to use this for future clients? If you have a client who has $200,000 in cash but would like to buy a home that is $250,000 they can do so without having a payment. Obviously, this is just a generic example and would be subject to a great deal of specific circumstances but essentially if the borrow were 67 years old at the time of the purchase at today’s interest rate, they would be able to purchase the $250,000 home with just $139,921.95 down at the time of purchase.
This would leave an additional $70,000 in cash for the borrower to live on and upon their death his heirs will have a year to pay off the original debt of $110,078.00 plus interest, mortgage insurance premium and taxes paid on the borrower’s behalf. The heirs would have one year to either sell or pay off the mortgage balance.
I am not a financial expert however if you take ten minutes to research this by talking to a financial expert you will discover these facts: If the borrower were a single man and lived in the home for ten years from date of purchase and invested the money in an annuity at 10% (they are advertised daily at this rate) his $70,000 saved would become $181,561.97 (less fees). At the time of the sale of his home, based on a 5.2% interest rate, $1,200 per year in tax, $1,500 per year in hazard insurance and $400 per year in mortgage insurance, roughly $173,000 would be due to the bank at the redemption period.
Selling the house for the estimated $335,979.00 upon the borrowers exit from the home (based on a annual 3% growth rate of real estate), the heirs will receive $344,540.97 in inheritance when the sale of the home is combined with the interest earned from the $70,000 invested. This takes place while the home owner lived in the home they wanted rather than the one they would have settled for, had complete security with no payments (better than if they paid cash, as with an all cash sale they would be forced to pay taxes, hazard insurance annually).
This is a very basic outline of how this can work, obviously these are somewhat complicated transactions and there is a lot more to learn about them that can be explained in a Facebook or blog post, hopefully this sparks some curiosity and you take the time to research other options for your clients. An immense knowledge base and being a true resource for your client is something NO internet application can replace.