Q. My wife and I are looking to buy a condo that would be our retirement home. We would be in the process of selling the house we currently live in, which unfortunately still has a considerable mortgage balance – not so much equity. Is a reverse mortgage something we could use here? Advantages and disadvantages ?
A. There are a lot of things to consider to make sure you understand how a reverse mortgage might work.
As you know, with a traditional mortgage, a bank lends you money to buy your house. You repay the loan by making monthly payments over 10, 20 or 30 years.
In a reverse mortgage, the bank lends you money against the equity in your home, said Bernie Kiely, certified financial planner and certified public accountant at Kiely Capital Management in Morristown.
âSince the funds are the proceeds of a loan, they are not income subject to state or federal income tax,â he said. âAs with a traditional mortgage loan, the loan is subject to interest. “
The big difference between a traditional mortgage and a reverse mortgage is that there are no monthly payments with a reverse mortgage, Keily said.
âBecause there is interest accruing and no monthly payments, your mortgage balance grows a little bit each month,â he said. âWith a reverse mortgage, everyone on the deed must be at least 62 years old. If one of the co-owners is 62 years old and the other is not, the youngest must agree to have his name deleted from the deed.
There are four parties to a reverse mortgage, Kiely said. 1. The equity you have or will have in your home 2. Your life expectancy 3. The market value of your home 4. Interest rate in effect
He recommends that you sit down and have a conversation with a banker who deals with reverse mortgages.
The equity you’ll have in your new home is the money you’ll be able to put toward buying your new home, he said.
âThe banker will use a mortality table to calculate your life expectancy. By referring to the current interest rates, the banker will be able to calculate how much the bank would be willing to lend you under a reverse mortgage, âhe said. âThe loan from the bank and the cash you have available will determine the value of the home that you can finance with a reverse mortgage to purchase. “
If you buy the new home before you sell the old home, you won’t have the money available to set aside your new home, Kiely said. You should discuss getting a short-term bridging loan from your reverse mortgage banker or other banker, he said.
âThe advantages of a reverse mortgage are the absence of monthly payments. It can really help your cash flow in retirement, âhe said. âThe downsides are that you probably won’t pass your condo to your kids. “
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Karin Price Mueller writes on Bamboo column for NJ Advance Media and is the founder of NJMoneyHelp.com. Follow NJMoneyHelp on Twitter @NJMoneyHelp. Find NJMoneyHelp on Facebook. Sign up for NJMoneyHelp.com‘s weekly electronic newsletter.