Reverse Mortgage: Only in an Emergency
|Written by Ken Teegardin|
SeniorLiving.Org Expert on Chief Editor | Caregiver
For some seniors, the sub-prime mortgage crisis was just a headline. But for those who were hooked into an expensive mortgage, the results may have been financially and emotionally devastating.
Combine this with an economic recession and you have bankruptcies and foreclosures for many seniors.
If you are a senior living with financial difficulties, you may consider a reverse mortgage. However, only consider this loan in an emergency. Consumer Reports (a non-profit orgnaziation) says "For seniors reverse mortgages can carry big risks and come at a high cost." and HUD says "If you are interested in a reverse mortgage, beware of scam artists that charge thousands of dollars for information that is free from HUD"
Reverse Mortgage Basics
A reverse mortgage allows people 62 or older to borrow money against the equity in their home. The money can be used for anything: home improvements, vacation, debt consolidation, medical bills, whatever you like. The main difference is that rather than making monthly payments, you pay off the loan when you die, move or sell the home.
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Before applying for a reverse mortgage, you must meet with an approved counselor. A list is posted online at the U.S. Department of Housing and Urban Development (HUD).
Loan proceeds are received as a lump sum, line of credit or monthly payments. Loans are available in fixed rates or adjustable.
The house title remains in your name. You repay the lender when the home is sold or from your estate. Additionally, the loan must be repaid if you fail to pay your property taxes or homeowner’s insurance or if you let the property’s condition deteriorate.
Repayment includes the cash you received, plus interest and fees. Any remaining equity belongs to you or your estate.
While many seniors have used these types of loans—over 660,000 were issued between 1990 and 2010—you should consider reverse mortgages only in an emergency.
Three Types of Reverse Mortgages
- Federally insured reverse mortgages or Home Equity Conversion Mortgages (HECMs) and backed by HUD.
- Single purpose reverse mortgages are offered by non-profits, state, and local governments.
- Proprietary reverse mortgages are offered by the private companies that develop them.
Features and Costs
Your loan amount depends on your age, interest rates and your home’s value. The older you are, the more money you can get. The lower the interest rates, the greater the loan amount. And the greater your home’s value, the greater the loan amount.
Because of the convenience of not having to make monthly payments, reverse mortgages contain many upfront costs. Common fees include:
· Origination Fee: Capped at $2,500 or 2% of the first $200,000. It’s 1% after that with a total cap of $6,000.
· Mortgage Insurance Premium (MIP): 2% of the appraised value.
As an example, suppose your home is valued at $200,000. You borrow $50,000. The MIP fee will be $4,000 (2% x $200,000). The fee is always calculated on the appraised amount no matter how much you borrow.
However, a new HECM called a Saver, lowers the MIP to just 0.01% (.0001) of a home's value. On a $200,000 home, that means you'll pay just $20.
On any HECM loan, you’ll continue to pay a 1.25% MIP fee on the outstanding balance every year.
· Title insurance varies by the value of the home.
· Title, Attorney, and County Recording Fees varies by location.
· Home Appraisal $300 to $500
· Survey $300 to $500
Calculating HECM Reverse Mortgage Rates
Index Base Rate-- 6-month LIBOR (London Interbank Offered Rate)
Interest Margin-- 3.1% for Fixed Rate + 1.25% MIP Margin
Periodic Rate Adjustments (Adjustable Rate only)-- Current T-Bill Rate plus Margin for Monthly Adjustable
Interest Rate Caps-- Initial fully indexed rate + 10%
Reverse mortgages are a very expensive way to borrow money and in some cases, they can be a catastrophe. If the loan comes due because of death and the market is slow (which it is almost everywhere), the family may not be able to sell the house in time to pay off the loan and entire property can be taken by the bank, leaving the family estate worthless. It is not a good option for seniors looking for a lifestyle upgrade or some quick cash.
For seniors living with a real financial emergency, it may be the only way out. Unlike a traditional mortgage, you won't have to make a monthly mortgage payment. You pay the loan back when you die, move or sell your home.
Updated: Apr 04, 2011