Home Loan Financing Basics – Fifth in A Series

Reverse Mortgages:

For seniors, there is a relatively new mortgage available called a reverse mortgage. This type of mortgage is useful for people who have a large equity in their home, but who live on a fixed budget and find it difficult to live on their current income. Many seniors in this situation are forced to sell their homes. Instead of selling your home, a reverse mortgage pays the home owner a fixed amount each month while they own the home, with the mortgage amount thus increasing each month for the amount of the payment, plus interest. There are several types of reverse mortgage products, one of which, the Home Equity Conversion Mortgage which is used by 90% of reverse mortgage borrowers, is federally insured. All reverse mortgages are due and payable when the last surviving borrower dies, sells the home, or permanently moves out of the home. (Typically, a “permanent move” means that neither you nor any other co-borrower has lived in your home for one continuous year.) For those homeowners who are sophisticated, they can effectively accomplish the same thing by obtaining a home equity line of credit, which is relatively inexpensive to obtain, and designing their own monthly draw program on their loan by utilizing a payment calculator using various assumptions about their age, home value etc.

An excellent web site for borrowers is one run by Jack M. Guttentag, Professor of Finance Emeritus at the Wharton School of the University of Pennsylvania, which is called Mortgage Professors’ Web Site. This site contains many excellent articles and advice on obtaining a mortgage and also includes many very useful calculators.

Sources of Funds for a down payment:

Sources of funds to make a down payment on a home can come from one of several sources:

1) Savings
2) Home equity line of credit on your existing home
3) Borrow money from your 401(K): You may borrow money from your 401(K) for a down payment on a home purchase, if the plan allows for it without a penalty. You may not borrow money from your IRA for a down payment, however 1st time buyers, may withdraw funds one time with out paying a penalty, up to $10,000, however you would have to pay income taxes on the withdrawal.
4) Equity from the sale of your existing home or investment