Wednesday, June 19, 2024
Conversion mortgages can help senior homeowners use their frozen equity to downsize.
Urban Living
Posted By Babs De Lay on June 19, 2024, 4:00 AM
Did you know that the root words for "mortgage" are the French mort (meaning death) and gage (pledge)—which literally means a death pledge? Wouldn't it be nice to not have a mortgage payment each month? For seniors, it's possible with an FHA-insured Conversion Mortgage for Purchase, or H4P as it is known in the lending industry.
Many of my friends and/or their parents are wanting to downsize from the large manse in which they reared their kids to a smaller, more manageable property that could offer single-level living, like a condo. However, if they were to sell their home, they may not have enough equity to pay cash for the new purchase and may have to apply for a mortgage.
Often, parents are retired and living on a fixed income—so having any type of mortgage payment could not work financially for them and keeps them stuck in a large home, owing little or nothing with a ton of what we call "frozen equity" in the home.
The age of the senior and the current mortgage interest rate both point to how much the senior would have to put down on a purchase. For example, if they sold their home and walked away with $300,000 in profit and put it all down on a $500,000 condo, they'd have to get a traditional mortgage for the remaining $200,000. With rates hovering around 7% for a 30-year loan, the payment would be around $1,600 per month for interest, taxes and insurance, plus the monthly HOA fee.
With the H4P loan, there is no mortgage payment. The lender will add in what the monthly payment for the mortgage should be to the principal balance of the loan. If the senior wants to sell later on to move in with family or to assisted living, they will have to repay the mortgage.
FHA guidelines for this product ensure that borrowers don't have to pay back to the bank more than the full loan balance or 95% of the home's appraised value once they sell, whichever is less. If the loan balance is higher than what the property is worth, FHA mortgage insurance will cover any shortage for the senior—or their heirs if said senior has passed.
This loan product can also be used to purchase a home, as I've had several clients use this "reverse mortgage"-type loan to get into new digs with no mortgage payments and frankly, it may have extended the life of many of these folks to be able to move into a home or condo with no stairs, roll-in showers and a small yard or no yard to deal with. Have the talk with your parents or grandparents, as there is no age limit to this loan, beyond being the required 62 or older.
About The Author
Babs De Lay
A full-time broker/owner of Urban Utah Homes and Estates, Babs De Lay serves on the Salt Lake City Historic Landmark Commission. A writer and golfer, you'll find them working as a staff guardian at the Temple at Burning Man each year.
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