New regulations are changing who might benefit from a reverse mortgage.
Aging TV stars hawk them. Financial gurus disdain them. Marketing specialists extoll their virtues. Who’s right about reverse mortgages? As with most things in life, it depends. However, recent regulatory changes protect the consumer more than in the past and make certain older adults viable candidates. And as the industry responds to the new rules, products are emerging that may appeal to a higher net-worth customer than before.
Reverse mortgages are exactly what they sound like: mortgage products that allow people with enough home equity to draw it back out (to take payments instead of making them) of their residence while aging in place. Reverse mortgages can give older adults enough added income to thrive instead of just barely get by.
There are three main types of reverse mortgages:
- The most common variant is the Home Equity Conversion Mortgage (HECM). It was created in 1998 to assist older Americans who wanted to age in place but needed more income than what they got from other sources. These loans are controlled by the Federal Housing Administration (FHA), an offshoot of the U.S. Department of Housing and Urban Development (HUD), whose main function is insuring mortgages against borrower default. As such, loans max out at $726,525, and all borrowers must pay insurance premiums of .5% (for loans of 60% or less of appraised value) to 2.5% (the cost if the loan is more than 60% of value). You can take the proceeds as fixed monthly payments, a lump sum, a line of credit or a combination of these.
- Many states allow proprietary (private) reverse mortgages that aren’t federally regulated. As such, homeowners don’t have to pay mortgage insurance premiums. The catch is that they may carry higher interest rates. However, these loans may cover higher-value homes or allow buyers to access a higher percentage of their equity.
- Often offered by government agencies at the state and local level or nonprofit organizations, single-use reverse mortgages carry restrictions on how they may be used. They may be slated to pay off property taxes, catch up on homeowner association (HOA) fees or complete needed repairs. The lender must approve how the loan will be spent before it’s approved. These loans don’t require mortgage insurance and are typically for smaller amounts limited to what is needed to achieve their specific purpose.
Who Can Get a Reverse Mortgage?
To qualify for an HECM reverse mortgage, you must be at least 62 years old and have significant equity in your primary residence. You must be able to continue paying property taxes, HOA fees, maintenance, insurance and other costs of homeownership. You also can’t owe any federal debts, such as taxes.
The dwelling must meet a few requirements, too. It can be a single family residence, a condominium approved by HUD, or a multi-unit dwelling with up to four units, as long as you live at least six months of the year in one of them.
Just like when you take out a mortgage or refinance your home, there are upfront costs for any reverse mortgage product. For an HECM, that starts with an origination fee to cover the lender’s operating expenses. Lenders can charge $2,500 or 2% of the first $200,000 of your home’s worth plus 1% of the amount over $200,000. Lenders may waive or reduce origination fees.
You’ll pay 2% of the home’s appraised value upfront for the mortgage insurance premium, but it doesn’t stop there. You’ll be charged .5% of the outstanding loan balance annually, but this charge doesn’t get taken out of your available loan proceeds. Rather, it accrues over time and is paid when the loan is called due and payable.
An appraisal fee is charged depending upon the region, type and value of your home, but it averages $450. You generally have to pay it in cash before the loan is signed. The appraiser has to certify that your home is structurally sound and complies with home safety and building codes.
You can pay for closing costs with loan proceeds, but they need to figure into your decision of whether or not a reverse mortgage makes sense for you. Fees listed below are averages and may be more or less.
- Credit report fee: $20 to $50
- Flood certification fee: $20
- Escrow, settlement or closing fee: $150 to $800
- Document preparation fee: $75 to $150
- Recording fee: $50 to $500
- Courier fee: $50 or less
- Title insurance varies, but rises with the size of the loan
- Pest inspection: under $100
- Survey: under $250
Servicing fees are monthly costs the lender charges for loan administration. They may be fixed or calculated into the interest rate of the loan. Federal regulations cap the fee at $35 per month, which will normally amount to several thousand dollars over the anticipated life of the loan, depending on the borrower’s age and life expectancy.
Use a reverse mortgage calculator to get an idea of what total costs might be.
Who Is a Poor Candidate for a Reverse Mortgage?
There are some instances where a reverse mortgage won’t be able to meet your goals and needs. If you have high medical bills and may not be able to continue living in your home, seek out a different solution. The loan will become due in full when you no longer live at your primary residence, so moving to a treatment facility or assisted living for more than 12 months will trigger repayment.
You may be moving soon. No matter what the reason, if you’re thinking about changing residences in a few years, then the costs of a reverse mortgage generally outweigh the benefits. You’re not prohibited from moving, but if a homeowner voluntarily vacates the property, he or she will have six months to repay the loan in full.
The upfront costs are more than you can afford to pay. If you can’t cover property taxes, homeowners insurance premiums and home maintenance costs, you won’t qualify for a reverse mortgage. In that situation, you might want to check into property tax deferral programs for older adults or a program to help low-income homeowners with repair expenses.
You need to think about the consequences if you live with someone who is not your spouse. If you die, sell your home or choose to move out for more than a year, the loan becomes due. Friends, relatives and/or roommates could be forced to move out. You can list boarders on loan paperwork, but if they’re younger than 62, they can’t be borrowers.
If you want heirs to keep the home. When a borrower dies, the loan must be repaid or the house will be sold to generate the cash. Your home can be passed down to heirs, but it will carry a mortgage balance. In many cases, heirs don’t have the funds to pay off the home, and they may not qualify for a mortgage.
When a Reverse Mortgage May Be the Right Answer
Many protections have been put in place since 2014 to correct problems giving reverse mortgages a bad name. While it’s always vital to evaluate any financial product thoroughly, there are circumstances that may make a reverse mortgage the right answer for you.
You’re not planning to move anytime soon. Nothing prohibits you from moving if you have a reverse mortgage, but the numbers don’t add up. Just like when you refinance your home, it only makes sense if you’ll be staying there a while. And if you move, you’ll have to repay the mortgage.
Your spouse is 62 or older. You can still get a reverse mortgage if your spouse is younger, but he or she can’t be a borrower. New laws protect a non-borrowing spouse in the event of your death, but that person won’t be able to continue to receive loan proceeds. It’s not a problem if there’s plenty of money to last until the spouse dies, but it can create a hardship to someone dependent on the monthly income stream or line of credit a reverse mortgage can provide.
You can afford the ongoing costs. If you fall behind on property taxes, homeowners insurance or home maintenance, your lender can call the loan due. County authorities supersede lenders, and they’ll step in if your property taxes aren’t paid for a long enough time. They can place a lien on the residence, take possession and sell it to recoup taxes.
You need a solution to long-term financial problems. Just to get your foot in the door, you must own your home outright or have substantial equity. Hopefully that means you’ll use funds wisely and make them last.
You have no plans to bequeath your home. Sure, you can still put it in a will, reverse mortgage or not. But your heirs will have to pay off the mortgage, and they may choose to let the house go, or simply may not have the needed funds or the ability to qualify for a mortgage.
New Products Entice Different Crowd
Lenders are taking aim at homeowners with property values above $700,000 as they roll out reverse mortgage products with fewer restrictions, lower initial costs and more money available to draw down. These jumbo proprietary loans have lofty highs of $2.25 million, but like their little HECM brothers, borrowers will never owe more than the value of the home.
“If using the equity in your house will enable you to travel or live where you want to live and not spend the whole retirement stressing about running out of money, it’s really a wise use of the equity,” says Jeremy Kisner, senior wealth adviser at Jeremy Kisner Wealth Management in Phoenix.
Another use for the high-end products is to create an income stream so homeowners can avoid digging into their stocks when the market goes down. With the bull long in the tooth, many investors are looking for protection, and this is one way to do it. Several lenders are developing products with variations to appeal to different clients.
No matter your situation, perhaps the most important thing is to make sure you understand exactly how a reverse mortgage will work in your situation. If you’re interested in a HECM, start educating yourself at the HUD website. Reverse mortgage interest rates closely mirror those of conventional mortgages, but just as with a conventional loan, be sure to check out a number of lenders and compare rates and total costs. If they can’t or won’t answer your questions so that you understand the terms, go somewhere else. And be sure to check out a home equity line of credit (HELOC) or refinancing against the reverse mortgage to see which will work best for you.
Click below for the other articles in the October 2019 Senior Spirit
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