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