A reverse mortgage can be a helpful option to people 62 years of age or older, enabling them to convert part of the equity in their home into cash while still maintaining homeownership. It is called a reverse mortgage because the mortgage flow is reversed: Instead of making monthly payments to a lender, the lender makes payments to the borrower in the form of a line of credit, a monthly payment, or a lump sum payment.
Types of Reverse Mortgages HECM. HECM is a Home Equity Conversion Mortgage. It is federally-insured; created by, and regulated by, the U.S. Government Department of Housing and Urban Development (HUD). The mortgages are issued by the Federal Housing Administration (FHA). There are two types:
● HECM Standard: you receive money from the equity in your home and it is not paid back unless you die, sell, or move. Upfront costs are high—the first mortgage insurance premium payment is required at 2 percent. On a $200,000 home, that would be $4,000. The ongoing insurance premium is 1.25 percent annually of the outstanding loan balance. This mortgage insurance premium payment must be kept current.
● HECM Saver: created in 2010, for homeowners borrowing a lower amount (10 to 18 percent less than the Standard), this version offers significantly lower upfront fees of only 0.01 percent. On a $200,000 home, that would be only $20. The ongoing mortgage insurance premium is equivalent to the Standard’s at 1.25 percent annually. Proprietary
● These are private reverse mortgages backed by the companies that develop them
● Upfront costs are high
● There is no income or medical requirements and can be used for any purpose
● Amount you can borrow is based on age, type of mortgage, appraised value of the home, and current interest rates. Single Purpose
● This reverse mortgage is offered by some state and local government agencies and nonprofits. It is the least expensive and is for homeowners with low to moderate income
● It can be used for only one specific purpose and must be approved by the lender. Examples include an identified home improvement, home repair, or a tax payment WHO QUALIFIES
● Homeowners 62 years of age or older
● Single-family home occupied by borrower or 2 to 4 unit home with one unit occupied by the borrower
● HUD-approved condominiums and manufactured homes meeting FHA requirements
● Your home is paid off or you have a low enough balance that you can pay it off at closing from the reverse mortgage
● You must receive consumer counseling information prior to obtaining the loan. There is a fee of approximately $125, which can be waived if eligible. All aspects of the process will be explained, including all fees, premiums, upfront charges, and the cost of the loan over its term.
● Funds are not taxable
● Funds do not affect your Social Security or Medicare benefits
● Some mortgages are fixed rate (based on the current interest rate) and some are variable rates
● You retain title to your home
● No monthly payment
● Loan is repaid when the last surviving borrower dies, sells the home, or no longer lives in the home as principal residence
● HECM loans provide that a borrower can be placed in a nursing home or other medical facility for up to 12 consecutive months before the loan is due
● You are responsible for taxes, insurance, utilities and maintenance
How You Receive Payments
Except for the Single Purpose Reverse Mortgage, which limits you to one approved expenditure, you can select:
● Fixed monthly cash advances over a specified period
● Fixed monthly cash advances as long as you reside in the home
● A line of credit available for your use
● A combination of monthly payments and a line of credit
Fees and Other Costs
● Origination fee
● Mortgage insurance premium
● Closing costs
● Appraisal fee
● Possible service fees over the term of the loan
● The amount you owe on a reverse mortgage grows over time
● Interest is charged on the outstanding balance and added to the amount you owe each month
● Your total debt increases as the funds are paid to you and interest on the loan accrues
● The monthly mortgage insurance premium is based on a percentage of the growing balance
● If you don’t pay taxes, insurance premiums, or fail to maintain the condition of your home, your loan may become due and payable
● Upon death of last surviving borrower
● You move from your residence
● You sell the home
According to the National Reverse Mortgage Lenders Association, the good news is that no matter how large the loan balance, you never have to pay more than the appraised value of the home or the sale price. This is referred to as non-recourse. If the HECM reverse mortgage balance exceeds the appraised value of the home at the time the borrower dies, moves, or sells, the federal government absorbs the loss. The government pays for it with proceeds from its insurance fund, which the borrower pays into monthly. This may be different with some proprietary (private) reverse mortgage lenders, so be sure you know what you are getting.
How to Cancel
After the loan closes, you have a three-day window during which you can cancel. Mortgage lenders may have different processes for canceling, so obtain contact and detailed information before leaving the closing. Generally speaking, you will want to notify the lender in writing, send the letter by certified mail, and ask for return receipt. Keep copies of correspondence and any enclosures for your records.
Is This For You?
There are certainly times when this will make sense for certain homeowners. Many people who have chosen this financial option as a way of freeing up more money in their retirement years are satisfied with their choice.
Unfortunately, there are also those who may have regrets for having gone this route because they listened to someone who did not have their best interest at heart.
If you are interested in getting more details about a reverse mortgage, contact a lender that is a member of the National Reverse Mortgage Lenders Association (NRMLA).
You can also get more information at www.Hud.gov.
Michal Cheney is a frequent contributor to Go Banking Rates, Credit Card Offers IQ, and Dough Roller, where you can find the best online banks to manage your money.