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Reverse Mortgages – now tightly regulated

The good news about reverse mortgages for older people who need additional funds to cover general living expenses is that their peers are turning to the reverse mortgage lending market in greater numbers. That fact points to a greater comfort zone for seniors with a very viable loan product that is now very tightly regulated by the feds and highly beneficial to those who need it.

What a Reverse Mortgage can you do for you

senior citizen checking documentation

If you are at least 62 years old and have equity in your home (ideally at least 50%) and are in need of funds to pay for your day-to-day expense, you may be a good fit for a reverse mortgage. You can convert the equity in your home into a lump sum payment or a monthly disbursement of cash. You no longer have to face the expense of making a monthly mortgage payment and for some seniors, that can make a significant difference in their lives. A reverse mortgage can move you from a position of living on the edge financially, to having adequate cash every month to meet your needs.

Neither you nor your family are required to repay the reverse mortgage unless you pass away, sell the property or no longer use it as your principal residence. And while you still occupy the home

Features of a Reverse Mortgage

Of primary importance to most borrowers is the fact that they remain the owner of their home while the lender takes a security interest in the property. In other words, no one can ask you to leave. BUT, you are still required to pay your taxes and insurance for the property.

All fees whether periodic or up-front are added to the loan balance at the beginning of the reverse mortgage.

You no longer pay principal or interest and your heirs are allowed time to seek refinancing if you no longer occupy the home.

Home Equity Conversion Mortgages include strong consumer protections and include a requirement that you take a pre-loan counseling program to ensure you understand the implications of a reverse mortgage before you commit.

Why Would a Lender Give you Money?

Many people wrongly assume that reverse mortgages are too good to be true, reasoning that something must be wrong when a lender essentially pays them, instead of them paying a lender. But HECMs work because your home usually increases in value. So the lender is estimating what the value of your house would be in say, twenty years time. Having added an amount for a reasonable profit, the lender can then afford to give you the difference between what they think your house will be worth and the cost of your current loan if any (that is your equity). If you or your spouse pass away, they will be able to sell the house and recover what they gave you and their calculated profit. No tricks. Just math.

Features of a Reverse Mortgage

One of the first things you will want to know: “How much will this cost?”.

  • Origination fee: Minimum of $2,500 and capped at $6,000.
  • Mortgage insurance: 2 percent initially plus 5 percent annually.
  • Monthly servicing fee: $30.
  • Five options for drawing funds:
    • fixed monthly payments
    • fixed monthly payments for a set term
    • Line of credit
    • fixed payments and a line of credit
    • fixed payment term and a line of credit

Individual lenders offer proprietary programs that are jumbo loans above the limit of $417,000 set by the Federal Housing Finance authority for any FHA-related loan product. There are high-cost areas where the limit may be increased to the lesser of 115 percent of area median price or $625,000.

Of course, your experience may vary so safeguards are in place to ensure that borrowers understand how HECMs or reverse mortgages work. One such safeguard is the counseling program. And as with all government-insured loans, lenders are tightly regulated. So if cash flow is tight and you have good equity in your property you should carefully consider the benefits of a Home Equity Conversion Mortgage.

photo courtesy of Seattle Parks, Creative Common License 2.0, modified from the original 427x640 to 320x568 and flipped.