Reverse mortgages may help some seniors meet financial needs if they have significantly paid down, or paid off, their mortgage. Unlike a conventional mortgage where the borrower makes monthly payments to the lender, in a reverse mortgage the lender pays the borrower (a lump sum, a monthly amount, or some combination of scheduled and unscheduled amounts). The amount a borrower will receive from a reverse mortgage generally depends on the borrower’s age, the home’s value and location, and the cost of the loan. The loan does not have to be repaid until the borrower sells the house, moves, dies, or some other triggering event occurs. Reverse mortgages can be specific, to make home repairs , or can be general to obtain cash to use for other purposes.
There are many types of lenders and reverse mortgages, including loans offered by various government programs, banks, credit unions, or mortgage companies. One of the most commonly used reverse mortgage programs, and the only program insured by the U.S. Federal government, is the U.S. Department of Housing and Urban Development’s (HUD) Home Equity Conversion Mortgage (HECM). A HECM is insured by the Federal Housing Administration (FHA) and is only available through an FHA-approved lender.
A HECM is available to homeowners who are at least 62 years old who own a single-family home, a unit in a two-to-four unit dwelling, a condominium, or mobile home with a fixed foundation, and live in the home most of the year. The borrower cannot be delinquent on any federal debt and must have the financial resources to make timely payment of ongoing property charges (like property taxes, insurance, and maintenance costs). Before receiving a HECM, the borrower must receive counseling from a HUD-approved counselor.
The borrower will also pay fees in addition to the interest rate, some or all of which may be financed and paid from the proceeds of the loan. The initial fee for HUD mortgage insurance is 2 percent of the appraised value of the home and then 0.5 percent annually. In addition, loan origination fees up to $6,000 and closing costs may be charged. Lastly, the borrower will pay a loan-servicing fee of no more than $35 per month.
When the borrower sells the house, moves, or dies, the amount owed under the HECM can be repaid by the borrower or the borrower’s heirs, or deducted from the proceeds of the sale of the house. If the house sells for more than the amount owed under the reverse mortgage, the borrower or the borrower’s heirs will receive any money left over. If the home’s sale price is less than the amount owed under the reverse mortgage, the borrower’s heirs won’t have to pay more than 95% of the appraised value due to the FHA insurance. You can find more information at www.hud.gov/program_offices/housing/sfh/hecm/hecmhome.
Look for our next article, Reverse mortgages – Pt. 2, about proprietary reverse mortgages in our next newsletter.