Reverse mortgages, also known as FHA Home Equity Conversion Mortgages (HECM) in the United States, are growing in popularity among the senior set. With this type of plan, homeowners who own their home outright or have a very small mortgage payment can actually receive cash from the home that doesn’t require immediate payback. This money can be used for improvements, medical expenses or to supplement social security.
Over time, your home is worth money thanks to increased value gained over the years. This is called equity. With a reverse mortgage, a homeowner age 62 or older qualifies to receive a percentage of the equity as cash payments. Unlike a home equity loan or second mortgage, however, the loan does not have to be paid back as long as you or another borrower is living in the residence as a primary home. You are still required to pay property tax, home insurance and other monthly utility payments, etc.
There is no worry about foreclosure or being evicted from the house if you outlive the loan, because payments are being made to you from the lender. You can never owe more than the value of the home, so there is little worry about being in financial peril. What’s more, should you sell the house or if it is left to relatives as an estate, the lender is repaid the amount of money you received in the reverse mortgage. The rest is available to you or your heirs.
Reverse mortgage amounts are based on a few factors, namely your age and the value of your home. The older you are, the higher the amount you can potentially receive on average. Also, reverse mortgages are available regardless of your current income, unlike home equity loans, etc. These loans are generally available from traditional lenders. There may be fees associated with application and loan closing, which vary from lender to lender. You can shop around for the best lender. It is not recommended to use an estate planning service to recommend a reverse mortgage lender.
In terms of receiving the cash value of the loan, there are a number of ways to receive the money. You can select equal monthly payments for as long as you’re living in the home; equal monthly payments for a specified term; a line of credit, where you can withdraw funds of various amounts as needed until the line of credit runs out; or a combination of methods.
To learn about available lenders for reverse mortgages, the National Reverse Mortgage Lenders Association (NRMLA) publishes a list which is available at ReverseMortgage.org. The Department of Housing and Urban Development (HUD) also publishes a list of approved lenders. Be sure they are part of the HECM program.
AVOID THESE REVERSE MORTGAGE PITFALLS
While reverse mortgages can be a boon to seniors looking to receive cash now, there are some dangers to be aware of that can prove costly to unsuspecting homeowners.
• The money for taxes, insurance and various fees is subtracted from the amount the mortgage holder receives for their monthly payment, thereby reducing the net amount of the money you will get each month.
• Be aware that if you move into a nursing home or other assisted care facility, which is likely for many seniors, your home is no longer your primary residence. The lender can then come for the loan. The same is said if you move to another residence for half of the year, which is common in a “snow bird” situation.
• You could be asked to pay higher fees and closing costs for a reverse mortgage than a traditional mortgage.
• Many unsuspecting homeowners are sucked into adjustable rate mortgages for their reverse mortgage. ARMs, as many know, have a fluctuating interest rate that can go quite high. Consider fixed-rate loans if you’re concerned about adjustable rates.
• You can use the money gained from a reverse mortgage on any expenditure. That can make splurging very tempting. However, should an emergency arise down the line, you may have depleted the cash available from your home already.