Question From Richard D.
Several Questions: (1) Is mortgage interest on a Reverse Mtg. ("RM")accrued on the entire approved credit limit or only on the actual amount advanced (paid out)? Example. If the approved credit limit is $300,000 but only $100,000 has been paid out (advanced), mortgage interest is accrued on what dollar amount? Is it on the $100,000 advanced or the entire $300,000 credit line? (2) Can borrower make periodic partial principal payments, against the outstanding principal balance, and thereby reduce the actual amount of mortgage interest accrual? (3) How and when is a refinance of an existing RM allowed with a brand new RM? And at what expense to borrower on any refinancing? And what are the restrictions, if any? (4) When using the RM approved credit limit for the purchase of a new home (purchase money), is the entire(100.0%) approved credit line available for this purpose? Or, is there some restriction on the amount that can be advanced in the first 12-month period? If there is a restricted sum, what is the limit and secondly why the limit? A final note. I am anticipating purchasing a newly constructed home, from a production builder, at a price of about $550,000. I am wanting to know what dollar sum I can expect from a RM so that I can determine how much of my own funds I will need to bring to the closing table. I am 75 years old and my wife will be 69. I look forward to your answers. RD
Since you numbered your questions, I will answer them in the same manner to keep it straight.
1) Interest only accrues on the portion of the line that you use. If you only borrow a portion of your line then you only pay interest on the outstanding balance, not the total amount available to you if that is higher (such as in your example). Learn more about the line of credit and interest charges here.
2) There is never a payment due but also never a prepayment penalty on a reverse mortgage so you can make a payment of any amount at any time, up to and including payment in full, without penalty. Since there is no payment due and no due date, anything you choose to pay may be paid at any time you choose. Any funds you repay may be re-borrowed at some point in the future if you desire but if at any time your balance reaches 0, unlike a home equity line of credit, your loan would be paid in full and closed.
3) Yes you can "technically" refinance your reverse mortgage loan any time after 18 months. I say technically because you have to meet a 5 times benefit to do so. In other words, you must be able to attain at least 5 times more benefit from the new Principal Limit than from the old Principal Limit (not the current balance) as it costs for the new loan. The costs are typically the third party costs in your area which include any state and local fees (this can be as low as $2500 for a property valued at $550,000 to as high as $5500 in some states). HUD will credit any Initial Mortgage Insurance Premium you paid on the first transaction so the additional cost would only be incurred if the property increased in value - but then again, a pretty substantial increase in value is usually the only way the 5 times benefit will happen. That's why I say that technically you can refinance the loan, but many borrowers find that the required increase in value does not allow them to do so in many cases except for during times of rapid appreciation. I advise borrowers not to plan on a refinance and then if it is possible later, it is a unexpected bonus.
4) HUD allows borrowers 100% usage of the line under 2 scenarios - when the funds are going to pay off current liens/mortgages on the home and for a purchase transaction. You would not have to wait for access to any funds and could receive 100% of your benefit amount to purchase a home on either the line of credit or the fixed rate reverse mortgage.
5) I would encourage you to contact our office for a proposal on the purchase. We do not require you to provide a lot of personal information and we do not hound you to complete the transaction - we are not a high pressure company. The reason being that on a purchase loan, some states have even higher purchase costs (such as mortgage taxes, intangible taxes, etc) and I do not know which state you are writing from. I would also like to send you a brochure we authored that gives potential purchase borrowers some additional information and you said you were considering a new construction home. There is an additional HUD requirement at this time that on new construction, we cannot even take a loan application until after the Certificate of Occupancy has been issued by the county or city where the property is located. Many builders will not accept this limitation as they want to close the loan right after the C of O is issued, not start the loan at that time. We are hoping that HUD may change this and other purchase requirements, but as of today, that is the rule under which we have to operate and there are other restrictions that all purchase borrowers should know as well. You are also welcome to use our reverse mortgage for purchase calculator to gather estimates anytime.