Understand Reverse Mortgages Before You Leap
Home equity can add up to between 30 to 40 percent of the net worth of most seniors. For individuals or couples at least sixty-two years of age, a reverse mortgage can be an option to turn equity into tax-free cash without forcing a senior to move or make a monthly payment.
There are plenty of television commercials advertising reverse mortgages as a great solution for older Americans, and they really can be. But they require a lot of careful consideration.
AARP has a reverse mortgage calculator you can use online. Click on
Here are the differences between a reverse mortgage and a bank home-equity loan. With a traditional second mortgage, or a home-equity line of credit, you must have sufficient income to qualify for the loan, and you are required to make monthly mortgage payments. A reverse mortgage doesn't consider income. You don't make payments because the loan is not due as long as the house is your principal residence. A reverse mortgage gets its name because of the way it works. Instead of the borrower making payments to the lender, the lender releases equity to the borrower in any of a number of forms. Options include a lump-sum cash payment, a monthly cash payment, a line of credit (which tends to be the most popular option), or some combination of these.
When the owner dies or moves away, the house can be sold, the loan paid off, and any leftover equity value can go to the living owner or the designated heirs. Heirs don't have to sell the house. They can either pay off the reverse mortgage with their own funds or refinance the outstanding loan balance within six months, with the option of two ninety-day extensions that must be applied for.
You can get a HUD reverse mortgage even if you didn't have a HUD loan to begin with. While your property must meet FHA minimum standards, it doesn't matter if you didn't buy it with an FHA-insured mortgage. Your new HUD reverse mortgage will be a new FHA-insured mortgage loan.
There are three basic types of reverse mortgages:
Single-purpose reverse mortgages are offered by some state and local government agencies and nonprofit organizations.
Home equity conversion mortgages (HECMs) are federally insured reversed mortgages backed by the U. S. Department of Housing and Urban Development (HUD)
Proprietary reverse mortgages are private loans that cover home values usually over $600,000.
The size of a reverse mortgage is determined by the borrower's age, the interest rate charged, and the home's value. The older a borrower, the more she can borrow, but the amounts are capped by the maximum FHA loan limit for each city and county. In 2007, the amounts varied from $200,160 in rural areas to $362,790 in many major metropolitan areas. In Alaska, Guam, Hawaii, and the U.S. Virgin Islands, the FHA mortgage limits can be adjusted up to 150 percent of the ceiling, based on the area.
Reverse mortgages have traditionally been chosen by older Americans who can't cover everyday living expenses or who otherwise need cash for such things as long-term care premiums, home health-care services, home improvements, or cash to pay off any current mortgage or credit card debt that is greater than their income can support. More recently, though, they've become popular with individuals who see them as a better alternative to home-equity lines. Some use the proceeds to supplement monthly income, buy a car, fund travel, and even help with the purchase of second homes. It is also possible to evaluate, with the help of a financial adviser, whether reverse mortgage funds can be used to restructure estate taxes.
You will have to consult with a financial advisor before you're granted this loan — that's one of the requirements. You might consider a certified financial planner professional (discussed in Chapter 2) to do this because reverse mortgages can be complex and risky. This step can be completed within the first few days of the process. The basic loan closing now takes place in about thirty to forty days from the date of application. Generally, the only out-of-pocket cost is an appraisal fee ranging from $300 to $500.
Reverse mortgages have several distinctive features you need to consider:
Cost: Reverse mortgages are generally more expensive than traditional mortgages in terms of origination fees, closing costs, and other charges. These can run between $12,000 and $18,000. The basic FHA-backed HECM loan finances these fees into the initial loan balance. The loans are based on anticipated home value appreciation of 4 percent a year, so if the housing market is healthy, those costs are generally recovered in a short period of time. But if the housing market sours, it will definitely take longer to recoup those fees.
Impact on other benefits: You'll need to make sure you're not endangering your federal retirement benefits. The basic FHA HECM is designed to provide tax-free income to seniors receiving their Social Security income. However, if your total liquid assets exceed allowable limits under federal guidelines, you might endanger your benefits. This is another critical reason to work with a financial adviser familiar with reverse mortgages on this decision.
Rates: Reverse mortgages have rates that are typically higher than those charged on conventional mortgages. Interest is charged on the outstanding balance and added each month to the balance being accrued, much like a home equity line of credit. Again, check the total annual loan cost.
Risk: Your mortgage can be called. The homeowner or estate always retains title to the home, but if you fail to pay your property taxes, adequately maintain your home, pay your insurance premiums, or change your primary residence, the lender can declare the mortgage due or reduce the amount of monthly cash advances to pay those overdue amounts.
Inheritance issues: Talk to your kids. If your house is your major asset, getting involved in a reverse mortgage may not leave much to the next generation; if it appreciates, there may be some difference that the kids can have. In addition to discussing a reverse mortgage with a financial adviser, seniors need to talk with their families.
What does retirement have to do with mortgages? The same thing credit card debt, college tuition savings, health-care costs, and a dozen other major lifetime expenses do — it's all about a pot of money that fights for a destination. How intelligently you manage that pot of money has everything to do with how you keep all those issues in balance.
