While it may seem new to many of us, reverse mortgages have been around for quite some time. The first reverse mortgage was issued in 1961 while in the first stages of development, and the program has undergone many changes since, ultimately developing into a more effective retirement tool.
Today’s most popular program is the federally insured Home Equity Conversion Mortgage, (HECM), overseen by the United States Department of Housing and Urban Development, or HUD.
And though these loans can get a bad rap, whether or not they’re right for you largely depends on your circumstances.
Reverse Mortgage holders can:
- Pay off the balance on their existing mortgage
- Consolidate outstanding debt
- Increase their monthly cash flow
- Tap into a line of credit when they need it
- Delay the need to begin drawing on social security funds
- Use proceeds to pay for in-home care
Who qualifies for a Reverse Mortgage?
- You (and the co-owner. if applicable) must be 62 or older
- You must own a home, though you may still owe on your mortgage
- You must continue to pay real estate taxes on your property, hazard insurance, and flood insurance (if applicable)
- You must maintain the condition of your home
What are the advantages?
- No credit check required
- No income requirement
- No monthly payments
- No repayment for as long as you or a co-owner live in your home
What else do I need to know?
- The amount you can borrow is based on your age, the value of your home, the county where your home is located, the interest rate, total closing costs and the amount of any liens against the property. The title remains in you and your co-owner’s name and you retain the right to remain in your home no matter how large your loan balance.
- The borrowers may continue to live in the home and the loan doesn’t have to be repaid until they leave, sell the home, or fail to meet loan obligations. Borrowers can receive the cash from a reverse loan in a single lump sum, as a monthly payment or line of credit, or a combination of these options.
- Borrowers retain ownership of their home but are subject to a lien granted to the lender.
- Borrowers are responsible for paying property taxes, homeowners insurance, and the home maintenance, and otherwise complying with the loan terms.
- Repayment is due upon the death of the owner(s) or if the home is no longer their principle residence. Upon death, heirs of the estate will have up to one year to pay the loan balance in cash or by refinancing the debt.
What are the other costs associated?
Yes. It’s also important to note that fees may be considerably higher than with a traditional mortgage.
- Origination fee
- Appraisal fee
- Title search fee
- Upfront cost of Mortgage insurance premium to HUD
- Interest, set by Fannie Mae following HUD’s guidelines, equal to 1-year US Treasury constant maturity rate, plus a margin.
A reverse mortgage may be right for you, if:
- You and the co-owner are at least 62 years-old
- You have minimal debt
- You have significant equity in your home
- If social security is your only source of income and you haven’t set aside enough funds for retirement
- If you have no heirs or have no plans to leave the property to your heirs
Reverse mortgages are not for everyone, especially for people whose heirs will inherit the property. But, if the upfront costs are not prohibitive and you are capable of meeting the obligations of maintaining the home and paying property taxes, homeowners, hazard, and flood insurance, a reverse mortgage might be a feasible option to add to your overall retirement plan.