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Reverse Mortgages for Seniors

Reverse Mortgages for Seniors

The reverse mortgage has been in existence for many years as a loan available to homeowners 62 years of age or older, which allows converting a portion of the home’s equity into cash. Intended as a tool to protect the borrower’s ownership in the home and enable them to remain living in the home, reverse mortgages remain an underutilized mortgage product, despite the well-documented economic struggles many senior citizens face.The most popular reverse mortgage is the US Federal Housing Authority’s Home Equity Conversion Mortgage.

HECM Basics
As with any matter involving long-term financial issues, it is imperative to understand the facts before you can make an informed decision that is in your best interest. Initially, an HECM counselor can explain that to be eligible there are:
1. Borrower requirements
– 62 years or older
– Own the property outright or have significant equity
– Occupy the property as your principal residence

2. Property requirements
– Single family home or a two- to four-unit property with one unit occupied by you
– HUD-approved condominium
– Manufactured home that meets FHA requirements

3. Financial requirements
– You must have sufficient resource to pay ongoing property taxes, insurance, home owner association fees and general upkeep
– You must not be delinquent on any federal debt
– You must have verifiable income, assets, monthly expenses and credit history

Amount of the Mortgage
The amount you may borrow through an HECM depends on the following three factors:

    • The age of the youngest borrower or non-borrowing eligible spouse
    • The interest rate
    • The least of:
      1. The appraised value
      2. The FHA limit of $625,000
      3. The sales price

Receiving Payments
The manner in which you receive payment through your HECM varies based on the terms of the type of mortgage you’ve agreed to. The options for a variable rate mortgage include:

  • Term: equal monthly payments for a fixed period of time
  • Tenure: equal monthly payments as long as one borrower lives and continues to occupy the property as the principal residence
  • Line of credit: unscheduled payments made as you choose up to the credit limit
  • Modified term: combination of monthly payments and a line of credit for a specified term
  • Modified tenure: combination of monthly payments and a line of credit for as long as one borrower lives

If you select and are approved for a fixed-rate HECM, you receive a single lump sum disbursement at the closing of the mortgage.

HECM Costs
One issue that concerns many potential HECM borrowers is the relatively high costs as compared to other types of mortgages. However, most of these costs can be financed from the proceeds of the loan so that the borrower can minimize out-of-pocket amounts.Of course, such an approach reduces the net loan proceeds.Specific costs include:

  • Mortgage insurance premium: you are charged both an initial mortgage insurance premium that varies between 0.5 and 2.5 percent based on the type of disbursement you receive and an annual mortgage insurance premium of 1.25 percent of the outstanding balance for the life of the loan.
  • Origination fee: payed to the lender for processing the loan, the origination fee for an HECM is 2 percent of your home’s first $200,000 value or $2500, whichever is greater, plus 1 percent of the value over $200,000. The maximum origination fee payable is capped at $6000.
  • Third-party fees: closing costs associated with an HECM include such items as property appraisal, title insurance, inspection, recording and other similar fees.
  • Service fees: Lenders may charge monthly servicing fees for the life of the loan of between $30 and $35.

HECM Reverse Mortgage for Purchase
In addition to utilizing an HECM to remain in one’s current home, the option of buying a new home also exists for those who qualify. The basic qualifications for an HECM on an existing property of age, type of home and use as principal residence apply to an HECM for purchase.The primary advantage of buying a home with an HECM is that the home is purchased outright, and there are no monthly payments.

To accomplish this, the proceeds from the reverse mortgage are combined with funds from other sources, such as savings, the sale of the previous home or other income. No mortgage other than the HECM can be used for the purchase of the new home. This option can be particularly helpful if you are considering downsizing or can no longer live in your present home because of an inability to safely walk up and downs stairs, for example.

A reverse mortgage can be a valuable tool in enabling seniors to maintain control of their home and their quality of life. If you have sufficient equity in your primary residence, you may wish to explore your options with a Home Equity Conversion Mortgage.