The vast majority of reverse mortgages are made through the Federal Housing Administration’s Home Equity Conversion Program (HECM). These mortgages are a unique type of home loan that allows borrowers to convert a portion of the equity in their homes into cash. Unlike a traditional home equity loan or a second mortgage, there is no repayment required so long as the borrower still lives in the house. In order to qualify you have to 1) be 62 years old or older, 2) own your home outright (or have a small remaining mortgage balance), and 3) live in your home. The amount available to borrow depends on a variety of factors, including the home’s appraised value, interest rate, and the age of the youngest borrower. The maximum amount that can be received is $625,000. Even more appealing to applicants–no credit check or income verification is necessary. The mortgage is based solely on the property value of the home. Borrowers can chose how they receive the money–as a lump sum, in installments, or as a line of credit where money can be withdrawn as needed.
Reverse mortgages are certainly not a new phenomenon–they have been around for decades. In the past, however, high origination fees kept borrowers away. Lenders have been known to tack on origination fees. Add these fees to insurance premiums and monthly service fees and a large chunk of the borrower’s cash goes into putting the mortgage in place before they see a dime. After reading the fine print along with the steep drop in home values over the past few years, it’s no wonder that reverse mortgages were not an option for everyone.
Fear not retirees, it seems as though a new day has dawned for reverse mortgages. Many banks are waiving their origination fees and other charges on certain reverse mortgages. Why now? Lenders are able to make profits on the loans by packaging them as securities and selling them off to Wall Street Investors. These mortgages tend to be much more predictable and stable than traditional mortgages and the market is enormous. If you have looked into reverse mortgages in the past, now might be the best time to give them a gander as they are undoubtedly less expensive. That is not to say that reverse mortgages are cheap, there are still some fees to put the mortgage in place. These changes make reverse mortgages more attractive to those who want to stay at home and need cash now.
Before borrowers dive right in, there are still few factors to consider. Along with the expenses, a great deal of the borrower’s equity will be erased as time goes on, perhaps even sooner than expected. Furthermore, these mortgages could potentially disqualify borrowers from other federal or state-run aid programs. Also, if only one spouse is named on the mortgage and that spouse dies–the mortgage must be repaid even if the other spouse is still alive. Borrowers who stay in their homes a long time, or who die at home, will leave their heirs little, if anything at all. Despite these unsavory caveats, a reverse mortgage may still be the best option for many retirees - especially if the proceeds are needed to pay for home care expenses. If you are considering a reverse mortgage, then discuss the option with an elder law attorney in addition to your banker. Doing so puts you in the best position to make the right decision.
© Machado & Carden, LLP 2010
