Often thought to be less expensive than a reverse mortgage, selling and moving is encouraged when one needs funds in retirement. My question is, if you sell where are you going to live? How long would those funds last? While selling should be considered, you need to look at the all details before thinking that it is less expensive, easier and would give you more equity from your home. Let’s look at the options.
Yes, if you sell you will have up front access to more of your equity than with a reverse mortgage. Whereas you can’t access 100% of the equity at the time you are originating a loan.
Closing costs for selling include 6% for the agent as well as other closing costs. On a $200,000 home sale the closing costs would be $13,400 to $14,400 depending on what the buyer would pay towards closing costs. Not to mention the costs and hassle of the move.
Closing costs with the reverse mortgage include the same fees as any mortgage: origination fee, appraisal, title fees, title insurance, credit and flood searches and recording fees. Because the reverse mortgage is insured by FHA there is also the FHA mortgage insurance premium (MIP). Keep in mind if one is doing a forward FHA mortgage they too pay the MIP. In Minnesota on a $200,000 home value closing costs would be approximately $10,400. (More on reverse mortgage fees next week.)
So the costs for selling aren’t any cheaper than the reverse mortgage – in fact it would cost more to sell and move than the costs of the reverse mortgage.
When selling and moving into a rental property you need to consider how long the additional funds from the sale will pay the rent. For example, if you own a home valued at $200,000 and you have a current mortgage for $100,000 that would be paid off leaving $86,600 in equity (after estimated $13,400 in closing costs). If your rent is $1,500/month, that would be 58 months or just over 4 ½ years of rent NOT including utilities, or other living expenses.
If you don’t have a current mortgage, then $186,600 would be left after closing costs giving 10 years of rent payments at $1,500 per month. (Senior housing rents would more than likely be $3,000+/month shortening the length of time your funds would last for rent.) Then when you don’t have more money for rent, where are you going to live? Public Housing?
Let’s take a closer look at selling compared to a reverse mortgage:
- As with a sale, the reverse mortgage would also pay off the current mortgage ($100,000 in this example).
- When selling you receive all the funds in a lump sum. With the reverse mortgage funds can be received in a lump sum, line of credit, monthly payments, or a combination of these. Funds in a line of credit grow so more funds become available over time. A growth factor is also built in if you choose to receive monthly payments. Over time with the reverse mortgage you could be accessing more than the home value was at the time of origination versus just receiving the value when you sell.
- Note: Depending on qualifying factors (age, home value, & expected interest rate) with the reverse mortgage additional funds may be available after paying off a current mortgage. Even if no additional funds are available after paying off a mortgage, cash flow would be improved with the reverse mortgage because there are no mortgage payments or rent payments.
- Unless you are investing the funds from a sale and getting significant returns on your investment, the reverse mortgage provides more funds over time and offers more options. Investments that are considered risky may not be a good option for seniors.
- With the reverse mortgage you will have a roof over your head without a mortgage payment or rent payment and you can stay in your home until the 150th birthday of the youngest borrower – yes, that is until you are 150 years old − as long as the home is your primary residence, you pay your taxes, insurance, maintain the property, and don’t break the terms of the loan (same for any loan agreement).
- If you consider the costs of property taxes, insurance and maintaining the property, cash flow is still more favorable with the reverse mortgage. Total your annual property taxes and insurance then divide by 12 months. Could you rent something for this amount? For example, if your property taxes are $2,000/a year and your annual insurance premium is $800 for a total of $2,800 or $233.33 a month, add $100 a month for maintenance totaling $333.33 a month – where can you rent something for this amount?
- In addition, the reverse mortgage is non-recourse which means there is no personal liability to you if the loan balance is higher than the fair market value at the time the loan is due.
Now let’s consider if you are selling and purchasing and moving to a new home. With the sale you will be paying the closing costs in addition you may also pay some of the closing costs on the purchase. Unless your current home has a lot more equity than the new home, you will need to obtain a new mortgage for the difference. Would this really benefit you?
Selling and moving may benefit you if you are downsizing to a townhome or condo. And if you do need a new mortgage for the difference of your sale price and the purchase price of the new home, a reverse mortgage home purchase program may be an option. We’ll discuss this in a future article – if you want this info sooner contact us if you are in Minnesota or a reverse mortgage lender in your state.
If your home is larger than you can manage and has a lot of equity where you could purchase a new one without the need of a mortgage, then moving might be a good option for you to access funds.
The reverse mortgage is less expensive and, in most cases, makes more sense than selling and moving. Now when you hear “consider selling over doing the reverse mortgage,” you can respond, “I don’t want to sell and move, the reverse mortgage is less expensive and gives me more options.”
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