Their biggest challenge – “Have I saved enough money to last 20 to 30 years?” Many haven’t and now look towards their homes as a source of additional money. A FHA reverse mortgage, also called a HECM (Home Equity Conversion Mortgage) can be an option to address this situation.
President Ronald Reagan signed the reverse mortgage program into law in 1989 to enable seniors to access money from their home equity. Over the years, there have been issues about this program, as well as myths and misconceptions. As a result, the Federal Housing Authority that controls reverse mortgage regulations have implemented many changes, safeguards and protections, some as recent as April, 2015.
What is a reverse mortgage and how does it work?
A reverse mortgage issued through FHA, also known as a HECM (Home Equity Conversion Mortgage), is a special t
ype loan for seniors. It is government insured to enable a borrower, age 62+ (co-borrower can be younger) to “age in place.” Borrowers can use a reverse mortgage to convert a portion of their current home equity into cash and to pay off their current mortgage, if applicable. The result – no mortgage payment! The borrower is still required to pay taxes, insurance, maintenance and other required fees, such as HOAs. There are various payout options, proceeds are not taxed and money can be used any way the borrower wants – for monthly expenses, long term care, or even for a vacation, second home or investment property.
A reverse mortgage can be used towards the purchase a new home that can make their life easier – one that may require less maintenance, eliminates steps, has services to shovel snow and cut grass and offers activities and companionship. The borrower brings to closing on the new home the amount financed using a reverse mortgage, (typically 50% to 60% including closing costs) and the remaining funds owed per the home purchase price, (typically 40% to 50%).
The reverse mortgage amount is set by the FHA and is based on the borrower’s age, property location and appraised value. A big advantage
of a reverse mortgage is that borrowers do not make mortgage payments so additional money can be available for any expected or unexpected expenses. As with any mortgage, the borrower owns their home. A reverse mortgage allows borrowers to stay in their home as long as they want. Even if one spouse or partner leaves the home due to illness, death or other reasons, the remaining borrower can stay in the home.
A reverse mortgage borrower must be 62+, live in their home as their primary residence, continue to pay property taxes, insurance, other required fees, maintains the home and completes a FHA approved reverse mortgage counseling session prior to submitting an application.
Unlike a traditional home equity loan or second mortgage, a reverse mortgage is not repaid until the borrower vacates the property due to a “maturity event” – home is sold, owner leaves for other housing, passes away or does not reside in the home for 12 months or more. The borrower or heirs then have six months to repay the loan, usually from sale of the property. After the home sale and loan repayment, remaining funds belong to the borrower or heirs. If the current appraised home value is less than the reverse mortgage loan amount due, then only the appraised home amount is due. They will never be “upside down” on their home.
With home values now rising and interest rates so low, now is a good time to consider a reverse mortgage.
*Pew Research Center URL http://www.pewsocialtrends.org/2010/12/20/baby-boomers-approach-65-glumly/
Anne L Matchett, Mortgage Consultant, Reverse Mortgages, NMLS#137647 PH 720-644-4763 Email Anne.Matchett@CHL.cc