Reverse mortgages can provide income to cash-strapped older homeowners, but they aren’t a panacea. They can be a quick source of cash but come with a price. To determine whether a reverse mortgage can help you meet your goals, consider the plusses and minuses.
How reverse mortgages work
Meant for homeowners age 62 and older, reverse mortgages are a special type of loan because the lender pays the homeowner while the homeowner continues to live in their home. The two main types of reverse mortgages are the Home Equity Conversion Mortgages (HECM) offered by the federal Department of Housing and Urban Development (HUD), and Proprietary Reverse Mortgages offered by some banks, credit unions, and other financial companies for higher value homes. (About 95% of the the reverse mortgages out there are HECM loans.) The HECM program offers two types of reverse mortgages: the traditional HECM Standard loan, and the HECM Saver loan which has lower upfront charges but also lower payouts.
The amount of the loan is determined by factors such as the borrower’s age; the amount of equity in the home; and in the case of HECM loans, a national limit imposed by HUD. Payments may be taken as a lump sum; line of credit; fixed monthly payments – for a specific period, or for as long as the borrower lives in the house; or a combination of payment options.
The loan must be repaid in full when the homeowner no longer lives in the home as the principal residence or fails to meet the obligations of the mortgage.
What reverse mortgages cost
A primary negative to reverse mortgages can be comparatively high costs. Reverse mortgages have closing costs just like traditional mortgage loans, but they can prove more costly. These expenses can include: an origination fee, an appraisal, a title search and insurance, surveys, inspections, and recording fees. HECM Standard loan borrowers must also pay a mortgage insurance premium up to 2% of the value of the home. Total fees are limited by federal regulations, but they can still add up. The HECM origination fee is capped at $6,000, and the minimum fee is $2500. Most of these costs, however, can be paid as part of the reverse mortgage loan.
Benefits of reverse mortgages
A reverse mortgage is a way to tap home equity but remain in the home. As such it gives up future access to value (and perhaps the children’s inheritance) in exchange for cash now. The cash from the reverse mortgage can help seniors remain in their homes by paying for extra help with their daily living or medical needs. It can be used to pay off the existing mortgage or other debts, or it can supplement the homeowner’s monthly income for a more comfortable lifestyle or to fund emergencies. However, since there aren’t limitations on how a borrower uses reverse mortgage proceeds, they also are available for less weighty purchases such as a trip, home modernization, new car, etc.
Reverse mortgages can be part of a sound financial plan for older homeowners, but must be carefully considered. Before using this device, which draws on the built-up equity in the home, homeowners should explore other programs which supplement a limited income. Many public and private benefits exist to help with expenses like property taxes, home energy, meals, and medications. The National Council on Aging (NCOA), a nonprofit advocacy organization for seniors, provides tools, information, and counseling on reverse mortgages and alternative options on their website ncoa.org/HomeEquity. Additional information about reverse mortgages appears at our Aug. 30, 2012 entry on this blog.
A big thankyou to FriedmanLaw’s paralegal Nancy Hochenberger for contributing to this article.
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