Reverse Mortgage for Seniors
A reverse mortgage is a type of mortgage loan for seniors age 62+. Reverse mortgage loans allow seniors to convert the equity they have in their home into cash. Reverse mortgage loans are insured by the Federal Housing Administration (FHA) and typically do not require monthly mortgage payments.
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 organization) 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”
What is a Reverse Mortgage?
Simply stated, a reverse mortgage is a financial vehicle, in the form of a home loan that allows you the opportunity to exchange a share of the equity that you have built up into your home. As such, rather than making payments towards your mortgage every month, it is you or your loved one that receives the payments.
What sets this financial vehicle apart from a traditional home equity loan however, is that you do not need to repay this obligation until such time as you no longer use the home as your primary residence, or you fail to meet the contractual obligations of the original mortgage. For seniors who own their home free and clear, this provides a ready source of available funds to help fund their retirement.
Whether using the money to take the dream vacation that got you through thirty years of boring staff meetings, or you need to cover emergency medical expenses. The extra money that a reverse mortgage can provide is a life changer for seniors worried about running through their life savings.
Reverse Mortgage Basics
A reverse mortgage for seniors 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.
Before applying for a senior 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 senior 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.
How Much Can Your Borrow?
A number of factors go into the determination of how much homeowner can borrow with a reverse mortgage. In general, the following all play a role in arriving at the amount including:
- Current interest rate
- Age of the youngest borrower
- Value of the home
For the purpose of the loan, loaners base the amount on the lesser of the appraised value, or the FHA limit of $625,500. In cases where there is no eligible, non-borrowing spouse, the date of birth of the youngest borrower is used to determine the available amount of the loan. Regardless of the valuation process, a reverse mortgage is an ideal way to infuse money into an otherwise fixed income, and provides seniors with the flexibility that they need to live full lives without the added stress of wondering how they are going to pay for their crucial needs.
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 OR 1.6% for Monthly Adjustable 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% For Adjustable Rate Option
Leaving Your Heirs Something After You’re Gone
Once the home is no longer used as the primary residence, the money from the reverse mortgage loan needs to be repaid from the proceeds of any sale of the property, so since you base the loan off only a fraction of your equity, the remaining interest that you have in the home can transferred to your heirs.
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.