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Are Reverse Mortgages a Good Idea for Retirees?

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side of green house constructed ...
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By Kelly Campbell

Interest has increased in recent years about whether reverse mortgages are a practical way to supplement retirement income. In a reverse mortgage, a lender makes payments to you based on a percentage of your home's appraised value.

Three Types
  • Proprietary/private: Where a private company creates and backs the loan.
  • Single-purpose: Where the loan proceeds can only be used for a specific purpose, stated by the lender. For example, money from a single purpose reverse mortgage could only be used to cover property expenses, including repairs, energy efficient improvements, taxes and insurance. Single purpose loans are not available everywhere, and are usually offered through local government agencies or nonprofit organizations. This also makes them the least expensive option.
  • The Home Equity Conversion Mortgage: This is the most popular type of reverse mortgage and is backed by the Federal Housing Authority and is federally insured.
HECMs allow a homeowner or homeowners, aged 62 and older, who either own their home outright or have a small existing mortgage, to borrow money against the equity of their home. Only single-family houses, occupied by the borrower or two to four unit homes, with at least one unit occupied by the borrower, are eligible. During the application process, you're required to meet with a government-approved housing counselor who will determine if you're financially capable of paying the costs associated with the loan.

Because you're taking out a loan against your home's value, you're still the property owner until the loan is due. This means you'll continue to pay property taxes, homeowners' insurance and maintenance costs. The balance of the loan becomes due when the borrower moves out of the house, or passes away. The house is then liquidated, and the proceeds are used to pay off the balance of the loan.

There are limits to how much a person can borrow using a HECM. A person can only take up to the FHA HECM mortgage limit of $625,500. If the home's value is under that cap, then the borrower is able to access a percentage of home's appraised value. However, owners with a highly valued home and little or no mortgage, may qualify for larger loan advances through a propriety-reverse mortgage, though the cost will likely be higher.

Lots of Rules

A reverse mortgage is typically structured so that the total loan amount, including interest and fees, will not exceed the value of the home over the life of the loan. However, if the proceeds from your home's sale exceed the balance of the loan, then you, your spouse or your heirs will receive the difference. Should the sale not cover the loan balance, then, in most cases, the lender's insurance will cover the difference.

The fact that reverse mortgages allow people to stay in their own homes is one of its major benefits, but if you're considering relocating or renting, then this isn't your best option. If you become sick and have to move into an assisted living facility for 12 consecutive months, then your home is no longer considered a primary residence, and the bank has the ability to take control over the house. This can become a major problem if only one borrower is listed on the mortgage.

The amount of money you can expect to receive from a reverse mortgage depends on several factors. The major components are your age, value of the home and the length of the loan. If there are two people listed on the mortgage, then the age of the youngest borrower is used. The current interest rate, initial mortgage insurance premium, closing costs and repair costs can also play a role in determining the monthly amount that you can expect to receive.

Current interest rates are important to consider, because they play two very important roles in the reverse mortgage process. First, they help determine a borrower's loan advance amounts. Second, they determine the interest charged on the outstanding balance. It's important to understand that the interest accrues over time, increasing the loan amount. This means that interest payments can take up a decent portion of your reverse mortgage payments, leaving you with less money than expected.

Payment Structures
  • Tenure payments: You'll receive equal monthly payments, as long as at least one borrower is living and continues to occupy the property as the principal resident.
  • Term payments: equal monthly payments for a fixed period of selected months.
  • Line of credit: unscheduled payments, in varying amounts, based upon your needs, until the loan is exhausted.
  • Single disbursement lump sum: a single payment when the loan is closed. However, recent rule changes could see payouts reduced by 10 percent to 18 percent, depending on underwriting factors.
Insurance Premiums and Fees

All FHA-backed loans require lenders to collect mortgage insurance premiums. If you withdraw less than 60 percent of the available loan amount, during the first year, the mortgage insurance premium is 0.5 percent of the maximum claim amount. If you take over 60 percent, the mortgage insurance premium increases to 2.5 percent. Borrowers will also pay a 1.25 percent annual premium that based on the maximum claim amount.

Outside of the insurance costs, reverse mortgages also tend to have high fees, including above-average origination costs, closing costs and numerous service fees. The maximum allowed origination fee on federally insured loans is 2 percent of the initial $200,000 of a home's value and 1 percent of the remaining value, with a cap of $6,000.

Closing Thoughts

A reverse mortgage isn't right for everyone. You should consult a financial professional who is familiar with your situation before you would take this option. Although being able to access the equity in your house without having to make monthly payments is attractive, the costs and fees associated with a reverse mortgage are negatives that must be considered. People should remember they might not be able to bequeath their house to heirs, which could also be a significant deterrent.

Seniors with a high credit score should carefully consider and analyze their options, including traditional mortgages and home equity loans. If you can comfortably make the monthly payments, then a home equity loan might be a way to accomplish the same goal, while also avoiding the fees associated with a reverse mortgage.


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13 Comments

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Judith

I have the Home Equity Conversion Mortgage, i.e., the reverse mortgage backed by the FHA and it was one of the best decisions I ever made. I paid all my credit cards in full, did a whole lot of home redecorating, and put the rest into nice, safe CDs. Before I got the mortgage I asked my three kids what they thought and all three said that they didn't need any inheritance and had no interest in having my condo when I died or ended up in a nursing home, so they'd just let the bank have it. Your next of kin or your heirs are not responsible for the debt unless they want to keep the property. That's exactly what happened with my late friend's condo unit - her kids didn't want it so the bank took it and that was the end of it. As long as the holder of this type of reverse mortgage remembers to do two things every year, without fail, there is no risk: 1) Supply proof of insurance to the mortage company. 2) Supply proof that the real estate taxes are paid in full. There is no excuse for not doing so, either, as the mortgage company sends reminders to that effect.

April 30 2014 at 6:28 PM Report abuse rate up rate down Reply
tree9616

We have a reverse mortgage ... and it's been a "saver" for us, esp. since my wife got fired (although absolutely unfairly & on trumped up charges). It's only in my name, since I'm the only one 62 or over in our family. One thing about this type of mortgage is that at the end (e.g. you die), someone has to come up with the money to pay this mortgage back. In our case, I've got my life insurance set where, that if I do die, my life insurance is where my wife (or other "survivor") will get the insurance payment which will pay the mortgage back, + have some extra. The life insurance (at my age ... 62+) is a bit hefty, but it beats what a reg. mortgage would be costing us.

April 30 2014 at 11:29 AM Report abuse +1 rate up rate down Reply
meanstr

Okay The Reverse Mortage I think is only good for single older people who have no one to will the house to because what happens the house they lived in after they die sits a few years and then ends up being sold for back taxes.Were instead these people could take the money and have a better life.

April 30 2014 at 10:35 AM Report abuse +1 rate up rate down Reply
codenamesparrow

try clark howard on 96.5 FM or WDBO he's on the internet also .

April 21 2014 at 12:24 AM Report abuse +1 rate up rate down Reply
phil.hergash

HMMMMM.

April 20 2014 at 11:44 PM Report abuse rate up rate down Reply
caffeine_kidd

No way there are other ways to go w/ out risking your most valuable asset, your Home.

April 20 2014 at 9:56 PM Report abuse -1 rate up rate down Reply
1 reply to caffeine_kidd's comment
calderasf

What's the risk? You stay in the home till you die or go to a home for 12 months?

April 30 2014 at 12:59 PM Report abuse rate up rate down Reply
teddrio

Once again, some halfwit nutcase who probably didn't even read the article (and if he did, didn't understand more than 10% of it) makes an irrelevant comment and shuts down all intelligent discussion. So typical.

April 20 2014 at 7:07 PM Report abuse rate up rate down Reply
petpetdon

A reverse mortgage is a sucker's bet.

April 20 2014 at 3:32 PM Report abuse +3 rate up rate down Reply
1 reply to petpetdon's comment
calderasf

really explain why? I will stop paying my mortgage and keep all my rents and my inconm will go increase by 1,886.60 a month without taking a dime out in cash.

April 30 2014 at 1:01 PM Report abuse rate up rate down Reply
obielies

DONT BUY ANYTHING ,WAIT TILL OBAMIT IS REMOVED FROM OUR WHITE HOUSE IN HANDCUFFS ALONG WITH HIS RECORD UNEMPLOYMENT N RECORD FORECLOSURES N HIS "GREAT RECESSION" IN WHICH WE ARE "STILL" IN TODAY. !!!!

April 20 2014 at 1:43 PM Report abuse -2 rate up rate down Reply
1 reply to obielies's comment
calderasf

I always take my financial guidance from bigots and racists

April 30 2014 at 1:02 PM Report abuse rate up rate down Reply
papajokr

No. Hell NO!!!!!!!!!!!!!!!!!!!!!

April 20 2014 at 12:18 PM Report abuse +3 rate up rate down Reply