Reverse mortgages are controversial, to say the least. They are available to people over the age of 62, and allow you to convert part of the equity in your home into cash. The older you are the more you may obtain. This is especially important to many cash-strapped older Americans.
The Ins and Outs of a Reverse Mortgage
Unlike a traditional home mortgage, which requires you to repay your home loan with interest on a monthly basis for a set period, a reverse mortgage allows you to take out a loan against the equity in your home and not repay it until you sell your home or die. The loan continues to grow, however, due to the accruing interest.
You are still responsible for paying your taxes and homeowners insurance as long as you live in the home. However, if you cannot pay these, the loan would become due. Additionally, you must maintain the home in good condition and make necessary repairs while you live there.
The amount you may borrow depends on several factors:
- Age of the youngest borrower
- Value of your home
- Interest rate of your loan
- Any upfront costs or fees
You may pay some upfront costs and fees out of the loan, meaning you will have lower out-of-pocket expenses. Home appraisal and counseling fees (if required) are the exception. You may receive the loan as a:
- Lump sum amount
- Line of credit
- Fixed monthly payment
- Combination of these
For example, you may choose to take a partial lump sum and retain the remaining balance in a line of credit.
Naturally, reverse mortgages have good and bad points that you must consider carefully.
The Good and Bad of a Reverse Mortgage
When you consider whether a reverse mortgage is right for you, consider these factors.
Positive of Reverse Mortgage
Negative of Reverse Mortgage
|You still live in and own your home without the cost of additional monthly loan payments||Full amount of loan is due and payable once you vacate the property either by moving or due to death|
|You can never owe more than the appraised value of the home (the U.S. government absorbs any difference)||The longer you stay in the home, the more interest accrues, the larger the loan becomes when it is due|
|The loan may be used for any purpose including paying off other debts or buying another home||Reduces the amount of equity available to pass along to your children|
|Most upfront costs and fees can be absorbed into the loan amount||Additional appraisal and counseling costs come out of pocket|
The Ups and Downs of a Reverse Mortgage
The common name for a reverse mortgage is Home Equity Conversion Mortgage or HECM. The U.S. Department of Housing and Urban Development (HUD) created HECMs. Though they continue to regulate them, a HECM is not a government loan. They are issued by traditional lending institutions and insured by HUD.
In addition to the interest charged on your loan, the government charges a mortgage insurance premium (MIP) to cover expenses when the:
- Lender cannot make a payment
- Value of your home is less than the loan balance
According to the National Reverse Mortgage Lenders Association, 99% of all reverse mortgages are HECMs. HECMs come in several forms:
- The Standard HECM is for seniors who need the largest amount of money. The amount you receive is based on a table created by HUD as well as your age, the appraised value of your home, and current interest rates.
- The Saver HECM is the low-cost version of the standard and is beneficial for those who need less money. You pay a lower mortgage insurance premium resulting in less available money to you.
- The For-Purchase HECM is best for seniors that want to purchase a different home without monthly payments. Using the reverse mortgage loan along with proceeds from the sale of your current home and any other sources of income, you can purchase a new home outright. If you want to downsize or find a home better suited to your current needs, this is the recommended HECM.
- Proprietary Reverse Mortgages are few and far between; however, it is important to give them a mention. These are non-FHA insured loans. Unlike HECMS, there are no fee or loan limits. They are known as ‘jumbo’ reverse mortgages.
Should you decide a reverse mortgage is the right move for you, consider finding a lender that is a member of the National Reverse Mortgage Lenders Association.