Simply stated, a reverse mortgage allows you to tap into the equity of your home, allowing you to stay in the home for as long as you like. Unlike a traditional mortgage — where you make monthly payments of principal and interest — a reverse mortgage has no monthly payments. The mortgage is paid off in full when the home is sold. In addition, you are not under any obligation to sell your home.
If you stay in your home until you die, then upon your death the house would be sold and the proceeds used to discharge the mortgage. If, for some reason, the house sold for less than the outstanding mortgage, neither you nor your estate nor your beneficiaries would be liable for the shortfall. The mortgage company assumes that risk.
If you qualify, a reverse mortgage might ease your financial situation since you could use the proceeds to pay off any existing mortgage. In addition, if you are able to withdraw more money from your home, you could use that money for anything you want.
Many seniors believe that reverse mortgages are something to be avoided at all cost. However, that is not the case. There are many situations where reverse mortgages make sense. A reverse mortgage is a great financial tool for a senior with financial issues, equity in their home and the desire to stay in the home long term.
Obtaining a reverse mortgage is a little different than obtaining a traditional mortgage. There are literally hundreds of different programs available for traditional mortgages. In addition, while fee structure and interest rates vary dramatically between different companies, this is not the case with reverse mortgages. Reverse mortgages have become very standardized and there are not a lot of options available to you. In today’s difficult economic times, seniors who are struggling should at least consider a reverse mortgage. The money from a reverse mortgage could be used to pay off an existing mortgage, pay off a high-interest charge card debt or even be used to provide additional cash flow on a regular basis.
The question to ask is do you plan to be in your home long term. If the answer is no, then a reverse mortgage is most likely not for you. However, if you are having financial issues and plan to be in your home long term, a reverse mortgage is definitely something worth exploring.
It is advisable for anyone even thinking about a reverse mortgage to consult with a financial advisor to see if a reverse mortgage makes sense for your particular financial situation.
The Federal Housing Administration (FHA) announced recently that it intends to make modifications to its Home Equity Conversion Mortgage (HECM), a reverse mortgage loan insured by the federal government, to make it more attractive and cost effective for older home owners looking to tap their home equity.
A HECM is a reverse mortgage that is insured by the FHA. It is designed to enable elderly homeowners (62 years or older) to borrow against the equity in their home without having to make monthly payments as is required with a traditional mortgage or home equity loan. Under a reverse mortgage, the borrower receives the funds as they wish in either a lump sum payment, monthly payments over time or on a “as-needed” basis, with the interest on the loan accruing and increasing the loan amount, but the outstanding balance is not due until the last borrower leaves the home, sells or passes away. One of the great things about a reverse mortgage with regard to the borrowers heirs is, if the balance due upon settlement of the loan exceeds the value of the home, the FHA insurance covers the difference.
The department’s plans to implement a new variant of the product, referred to as the “HECM Saver,” that will provide seniors with a reverse mortgage option that significantly lowers upfront costs by virtually eliminating the upfront Mortgage Insurance Premium that is required under the standard HECM option. There will be changes to the existing HECM loan as well (now referred to as a “HECM Standard.) The introduction of the HECM Saver and changes to the HECM Standard are expected to be effective this October.
The cost saving in upfront fees is able to be achieved because the amount of money available to a borrower, an amount known as the “principal limit,” under a HECM Saver will be reduced, substantially lowering the risk to the FHA insurance fund. Borrowers will receive approximately 10% to 18% less under the HECM saver option, than they would under the HECM Standard option.
Reverse Mortgages: Possible Answer for Struggling Seniors
Many older Americans find themselves house rich and cash poor. They own their home, or at least have significant equity in it, yet struggle to make ends meet each month. They could sell their home, but are not inclined to move and leave their memories behind.
A reverse mortgage may be the answer they seek. A reverse mortgage is a loan against your home that you do not have to pay back for as long as you live in your house. It basically converts your equity into cash, with no repayment required until the borrower no longer uses the home as his or her principal residence.
One version of this product is the Federal Housing Authority’s Home Equity Conversion Mortgage (HECM) which allows borrowers 62 and over to withdraw some of the equity in their home, providing a much needed financial boost to their income. However, the home must be a single family home or a one-to-four unit home where the borrower actually lives. Additionally, a HUD-approved condominium or manufactured home that meets FHA guidelines may also be eligible.
There are no restrictions on personal income, but the amount you can borrow does depend on your age, the current interest rate, the appraised value of your home or FHA’s mortgage limits for your area, whichever is less. Generally speaking, the more valuable your home is, the older you are, the lower the interest rate will be and the more you can borrow.
Seniors can use the money as they see fit, for example, for emergencies or medical expenses, to make home improvements, or to pay off debt. Homeowners will still be responsible, however, for the taxes and insurance associated with the property.
One requirement to receiving a HECM is that the borrower meets with a HUD-approved housing counselor who has passed a special HECM exam prior to obtaining the loan. This is protection for the consumer, as the terms and options associated with a reverse mortgage can be complicated. For instance, consumers need to fully understand that the up-front costs can be quite steep, and that money received from a reverse mortgage can be counted as income or an asset that restricts eligibility to some government programs. A reverse mortgage may not be your best option, and the counselor’s role is to review all the options available to you.
Reverse mortgages are the perfect solution for some people, but not all. At your counseling session, feel free to keep asking questions until you completely understand the reverse mortgage product.
Reverse Mortgages: Pros and Cons
If you own a home but are struggling to make ends meet, a reverse mortgage might be one way to boost your financial security. However, it’s important to investigate the pros and cons fully – and to seek out a qualified, professional financial adviser or institution to help you make the right decision.
These loans are highly regulated, and each customer must attend a counseling session from a federally approved agency.
The reverse mortgage enables older homeowners to convert part of the equity in their homes into cash. Instead of making monthly payments to a lender, as with a regular mortgage, a lender makes payments to you.
To qualify, borrowers must be at least 62 and own and live in the home as their principal residence.
The best thing about a reverse mortgage is the ability to access equity with no mortgage payments. It’s ideally for people who want to stay in their home. Someone who’s going to sell their home in the next year or so should not be looking at a reverse mortgage.
The amount received through a reverse mortgage is based on your age, the value of the home and the current interest rate.
Proceeds can be received as a lump sum, equal monthly payments for a specified time period, or as a line of credit to draw down whenever you want.
The lender is usually repaid when the home is sold or the borrower dies.
But find out about fees and other potential costs.
Reverse mortgages have high closing costs, typically about twice as high as a normal mortgage. They have adjustable interest rates as well.
Having that large cash balance on hand may affect eligibility for other forms of aid, such as Medicaid, so again, before taking the plunge and going for a reverse mortgage, get all the facts!
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