With the housing market struggling, many homeowners are finding creative ways to make their current home as affordable as possible. This trend is no different for the senior population. A new movement has been toward reverse mortgages, a unique type of home loan that allows a homeowner to convert part of the accumulated equity into cash.

Instead of paying down debt, a homeowner actually accrues it while receiving mortgage checks. No repayment is required of the borrower until they no longer use the home as a primary residence or fail to meet the mortgage requirements.

A reverse mortgage could be a help to a caregiver looking to keep a loved one in their home for as long as possible, and pay for services such as home care, medications, etc.

Reverse mortgages have been gaining popularity because it has become more difficult to sell a home, and some elderly homeowners find themselves unable to refinance or qualify for a traditional home-equity loan because of the more stringent credit standards.

Fact Sheet

First of all, what is a reverse mortgage? Below are some quick information bits to know before proceeding.

Eligibility: All borrowers must be at least 62 years old and must occupy the residence (where they live for the majority of the year). They do not have to have an income since no payments are made in this program. Singe-family, one-unit dwellings are eligible for all reverse mortgages, while some programs accept other types.  These include two-to-four-unit properties, manufactured homes built after June 1976, condominiums and townhouses. Mobile homes are usually not accepted.

Ownership: The homeowner still retains ownership of their home within the parameters of a reverse mortgage. They must still pay taxes, repairs, insurance, etc. When the reverse mortgage ends, the owner owes all cash advances made, plus interest.

Amounts: Each homeowner is eligible for a different amount of money, depending on their age and the home’s value.  Interest rates and closing costs by area will also be factors in the equation. 

Payments: The money can be paid to the homeowner in a variety of ways—all at once, in monthly cash advances, through a line of credit, or a combination. The line of credit is the most popular option as it allows the homeowner to decide when and how much of the cash they want paid to them.

Payoff: No payments are due while the mortgage is outstanding. The loan must be repaid when the homeowner no longer occupies the residence, whether because of death or moving away. The amount owed can never exceed the value of the home; and if the home is sold for more than the value of the reverse mortgage, the extra money goes to the individual or their estate. 

Red flags: There are changes a homeowner could make that would affect the security of the loan. These include renting out part or all of the residence, adding a new owner to the title, changing the zoning classification, or taking out additional, new debt against the home. A homeowner in a reverse mortgage should ask their loan advisor before doing any of these. Current mortgages: Many people, more than 60 percent, are using reverse mortgages to pay off an existing mortgage. This allows a greater cash flow every month for people in their later years of life.

There is one main type of reverse mortgage available to homeowners meeting the criteria already discussed. This is a Home Equity Conversion Mortgage (HECM).  It has been available since 1989 and is insured by the federal government through the Federal Housing Administration (FHA). The maximum loan limit for a HECM is $625,500. If a home is worth more, this is the still the amount a person can receive. If the home is worth less, it will be according to that figure.

There are fees associated with an HECM; but they are capped, making this loan affordable. The first is the Mortgage Insurance Premium (MIP), which is paid directly to the FHA in exchange for guaranteeing the loan.  This also ensures a homeowner will not owe more than the value of the home when the HECM must be repaid. The origination fee is another, capped at $6,000, as well as standard mortgage closing costs.

A main requirement of a HECM loan is counseling. Anyone considering the applying for a reverse mortgage is required to participate because, though a reverse mortgage may be a great option, it’s not for everyone. This helps individuals weigh the pros and cons for their unique situation, get information on interest rates, lending limits, closings costs, fees, lenders, etc.

Newest option

In September 2010, the Federal Housing Administration unveiled a modified version of the traditional reverse mortgage. The new HECM Saver was developed to lower the upfront costs associated with a reverse mortgage.

FHA Commissioner David Stevens said in a recent interview: "Despite the popularity of our HECM loan product, we have noted concerns that some senior citizens find that our fees are too high for them. In response, we created HECM Saver which will provide seniors with a reverse mortgage option that significantly lowers costs by almost eliminating the upfront Mortgage Insurance Premium (MIP) that is required under the standard HECM option."

This may not be the best option for homeowners wanting to receive the most possible dollars from a reverse mortgage if they need to pay off existing debt; but for those who have allocated only a portion and want to save the rest, it is a good opportunity.

As with the Standard, the money is advanced to the homeowner and interest accrues, but nothing is due until the homeowner dies, leaves or sells the property. If the loan balance exceeds the value at that time, FHA pays the difference.

Action Plan

If a reverse mortgage sounds appealing, there are steps to take in the process. The National Reverse Mortgage Lenders Association (NRMLA) takes a homeowner through this plan on its Web site.

First, homeowners need to have awareness about the possibility of a reverse mortgage and seek out information.

Second is education. The NRMLA suggests contacting a lender to learn more and have all questions answered.

Next, a homeowner must complete the mandatory counseling already discussed. Those who’ve made it past Steps 1 and 2 and still are considering a reverse mortgage can find a HUD-approved counseling agency. Counseling can be completed in person or by phone. The association lists several counseling sites on their Web site that the homeowner can contact.

The application is the fourth step in the reverse mortgage process. If, after counseling, a homeowner decides that a reverse mortgage is a good fit for them, they must fill out a loan application and select a payment plan. At that time, the lender tells the homeowner the total cost of the loan and the homeowner provides pertinent information on their residence, such as deeds, etc.

The processing of the application is next, in which the lender orders an appraisal of the home and makes sure it meets FHA guidelines.

The lender then proceeds with underwriting the loan, which can take four to eight weeks for final approval. Then, as with a traditional mortgage, there is a closing date. And, also as with a traditional mortgage, many papers must be signed by the homeowner.

The final two steps are disbursement and repayment. The homeowner has three business days after the closing date to cancel the loan. After that, it’s a done deal. The funds are disbursed as agreed upon, any existing debt is paid off and a new lien is put on the home. No payments are made until the end of the loan, when the homeowner ceases to live in the property.

Senior Protection

There are many safeguards in place today to protect seniors enrolled in a reverse mortgage. These are mandated by the FHA and help keep families out of a big financial risk.

One of them is the counseling, already discussed. Next is the standard and capped interest rates, limitation on fees, advance disclosure of the loan cost, and no maturity date. The latter means that the loan cannot come due during the homeowner’s lifetime. They have a lifetime right to occupy the home.

The loan can be repaid at any time without any penalties, and in no event will the loan be more than the value of the home.

Reverse mortgages are complicated and full of new terms and guidelines. It’s important that anyone considering this route learn all they can and see if it is the best fit for them or their loved one.

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