A reverse mortgage can be an attractive option for seniors to convert the equity in their homes into cash that may be used for a variety of purposes. These would include increasing one’s monthly retirement income, creating a line of credit that may be utilized at any time or simply withdrawing cash for home repairs, health care expenses or other purposes. The beauty of this vehicle is that you will continue as the homeowner and you may live in your residence for as long as you live.
In a “regular” mortgage, monthly payments must be remitted to the lender. With a reverse mortgage, monies are received from the lender, and repayment is generally not required so long as the homeowner continues to live in the home. Rather, the loan is repaid when the homeowner dies, sells the home or in the event that the home is no longer the person’s primary residence. The proceeds of a reverse mortgage generally are tax-free, and many reverse mortgages have no income restrictions.
In my view, the most viable option for a reverse mortgage is known as a Home Conversion Equity Mortgage and is guaranteed by the Federal Housing Authority. Eligibility requirements include:
• You must be 62 years of age or older.
• You must own the property outright or have a low mortgage balance.
• The property must be your principal residence, and must be worth less than $625,000.
• You must not be delinquent on any federal debt.
• You are required to complete a consumer information session given by a HUD- approved HECM counselor.
Additionally, the property must meet all FHA property standards and flood requirements, and you must be current in the payment of your taxes, homeowners’ and any required flood insurance premiums.
Then, too, since you will remain as the owner of the property, you must continue to pay all property taxes and ongoing insurance premiums. You are also responsible to make repairs to the residence as needed.
Under an HECM, there are five ways for accessing your equity:
• Tenure – equal monthly lifetime payments as long as at least one borrower lives and continues to occupy the property as a principal residence. For a 70 year old couple with a $500,000, under one option, $1749 may be withdrawn until the death of the youngest borrower.
• Term – equal monthly payments for a fixed period of months.
• Line of credit – unscheduled payments or in installments, at times and in an amount of your choosing until the line of credit is entirely depleted.
• Modified tenure – combination of line of credit and scheduled monthly payments for as long as you remain in the home.
• Modified term – combination of line of credit plus monthly payments for a fixed period of months selected by the borrower.
The amount you may borrow is based on your age, the current interest rates, the appraised value of the residence, and the required initial mortgage insurance premium. You can pay for most of the costs of a HECM by financing them and having them deducted from the proceeds of the loan. However, financing these costs will reduce the amount you can borrow.
The HECM loan includes several fees and charges, which include: mortgage insurance premiums, which over the life of the loan will equal 1.25 percent of the outstanding balance; third–party charges that resemble closing fees; an origination fee which can be no greater than $6,000; an interest rate that can be adjustable or fixed; and, ongoing servicing fees. These charges can be fairly steep.
If you are considering a reverse mortgage, I strongly encourage you to visit the Mortgage Professor’s website before doing anything else. You should never respond to a solicitation for a reverse mortgage without first educating yourself.
Got a financial planning question for Greg? You may e-mail him at firstname.lastname@example.org.
Greg Roberts is a certified financial planner with 35 years of financial and estate planning experience.
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