With the current Social Security crisis, many are concerned how long their benefits will truly last. Add to that a genuine concern over whether or not they’ve saved and invested enough for retirement and you can certainly understand the stress level of the 41 million people who are now ages 50 to 60.
Television ads nationwide have brought the term ‘reverse mortgage’ into the lexicon of many Americans. But exactly how they work is nevertheless a mystery. Also in question is how risky they are for seniors who sign-up. This article is a short course in exactly what they are and how they work:
- Where did the Reverse Mortgage Come From?
Federally-insured ‘home equity conversion mortgages’ (also known as ‘reverse mortgages’) came into existence in 1989. However, though many seniors with qualifying home equity are entitled to use them, it’s estimated that only about one percent of those qualified have put them into place. The majority of the growth which has occurred in the home equity conversion mortgage market has taken place in just the last few years.
- How Exactly Does It Work?
First, to qualify you must be 62 years of age. Second, the home you live in must be your ‘dominant residence’ and the amount of the equity you have in the home is meaningful. Basically, the higher the appraised value of your home and the older you are, and the lower your existing mortgage interest rate, the higher the amount for which you qualify.
The amount you can receive is flexible. For example, you can get either a lump-sum amount, or if you prefer, a line of credit to be tapped as you need it, or a monthly payment coming to you for a time certain (fixed term) or some combination of all the above.
There are no loan payments to make, so the threat of foreclosure is not a possibility. However, you have to keep your character taxes and homeowner’s insurance up to date, and of course, you have to continue the character so it doesn’t fall into disrepair and go down in value.
The reverse mortgage is only due and payable when you ultimately either sell your house, or when you reside somewhere else longer than a year, or when you die (or the last survivor borrower dies). At the time of your death, your heirs repay the lender from the money collected upon the sale of the house.
- What About the Math?
The reverse mortgage uses an appraised value for the home, which is ‘capped’ at the median home value for your particular county in the state you reside in. The ‘home keeper’ program sponsored by Fannie Mae was at $417,000 (and might nevertheless be). Of course, if the appraised value of your home is already higher, you can borrow an amount up to the limit allowed.
To save on accruing interest charges, the lump sum amount is probably not a good idea. Better would be the option of taking monthly payments or a line of credit. The well-known national association did a study in which they examined this example: a borrower, 74-years of age, with a $300,000 house would pay about $15,000 in upfront costs plus (over the life of the loan) and another $15,000 in monthly insurance premiums and servicing fees over the complete life of the loan. Many financial planners point out that the interest owed (which is paid after your death) is not tax-deductible and the longer the term of the loan (the longer you live) the higher the interest amount due.
- What Are the Safety Valves?
First, you can’t get a reverse mortgage without some screening. Under federal law, when considering a reverse mortgage and before you apply for the loan, you’re required to have a consultation with a HUD-approved counselor either by telephone or in person. Second, the math has to work. If the appraised value of your home is too low in comparison to the mortgage you now have, you won’t qualify. however, if your equity-to-value ratio is popular, you’ll likely be qualified (after you meet with a HUD-qualified counselor).
- Consider Your Options Carefully
There is a customized examination template that you may want to consider. You can use an online calculator to input your age, the approximate value of the home, and the zip code where the home is located (to see if your home is under the FHA limit in your county). The template then calculates your options which can be sorted by loan amount or by interest rate. To find the online calculator, go to www.goldengateway.com and see if the numbers work for your situation.