Seniors and Retirees, Consider Using a Reverse Mortgage
July 7, 2017 | by Jed Winegar of the NCPC
For many seniors and retirees, the hard-earned equity in their home is their single largest asset, yet it is unavailable to use unless they take out a home-equity loan. Conventional loans, like the home-equity, do not truly free up the equity to create a legitimate income because the money has to be paid back to the lender, with interest.
A reverse mortgage is a better way to tap into home equity without creating monthly payments and without requiring the loan to be paid back while the borrower lives in the home. Instead of making payments, the cash flow is reversed and the senior receives payments from the lender.
Why do seniors use Reverse Mortgages?
Over the last several years the number of reverse mortgages nationwide has increased dramatically. Many seniors and retirees are finding they can use a reverse mortgage to pay off an existing conventional mortgage or other debt, repair and update their home, or to simply free up cash to pay for long term care, medical expenses, and/or general living. Often, a reverse mortgage allows the aging to remain in their home much longer.
The most common type of reverse mortgage is a Home Equity Conversion Mortgage (HECM). It is insured by the Federal Housing Administration (FHA). So far, in 2017, over 36,000 HECM loans were made nationwide. Around 48,000 HECMs were made in 2016.
What is a Reverse Mortgage?
A reverse mortgage is a loan against the equity in the home which provides supplemental income advances and requires no mandatory monthly re-payments during the life of the loan. The proceeds from a reverse mortgage are generally tax-free and available as a line of credit, lump sum, or fixed monthly payments. The lender will recover the loan amount, plus interest once the owner(s) choose to sell their home or pass away. The remaining equity balance is passed onto heirs.
Those who utilize a reverse mortgage must continue to pay their homeowner's insurance and property taxes during the loan period. It is also mandatory to keep up with home's needed repairs and maintenance. The owners will retain title until they decide to sell as long as these requirements are met.
To qualify for a reverse mortgage, one of the home owners must be at least 62 years of age, have significant equity in the home, and live in, as a primary residence, a multi-family home, a condominium, or a Planned Unit Development (PUD). Permanent mobile or manufactured homes are sometimes eligible. There are no income or credit score requirements to qualify for the loan because there are no monthly repayments to be made.
The amount of reverse mortgage benefit for which an individual may qualify, will depend on
- the age of the youngest person on the title,
- the market value of the home and the equity in the home,
- current interest rates, and
- in some cases, where you live.
As a general rule, the older one is and the greater the equity, the larger the reverse mortgage benefit will be (up to certain limits, in some cases). The reverse mortgage must pay off any outstanding liens before additional funds can be withdrawn. Since there are costs associated with setting up a reverse mortgage it is not recommended for owners who do not intend to live in their home for a reasonable amount of years to realize the benefits.
What are the closing costs?
The costs associated with getting a reverse mortgage are similar to those with a conventional mortgage, such as the origination fee, appraisal and inspection fees, mortgage insurance and other servicing costs. With a reverse mortgage, all of these costs can be financed as part of the mortgage.
Under the HECM program, the maximum origination fee allowed is 2% of the initial $200,000 of the home's value and 1% of the remaining value, with a cap of $6,000.
Generally, reverse mortgage closing costs will be somewhere between $5,000 and $10,000.
This financial product is something to seriously consider when looking for supplemental income.
Hopefully, this article has given you a better understanding of how much a reverse mortgage might cost and how it can benefit you. Using a reverse mortgage is a big decision, we recommend getting quotes and information from multiple licensed lenders if you think using a reverse mortgage might be a good move.
A wonderful set of free information can be obtained from the Department of Housing and Urban Development's site.