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Reverse mortgages 101: What you need to know

According to The Associated Press, a record 11,216 reverse money mortgages were made in March of this year, up from 9,086 the month before. With retirees’ stock investments losing much of their worth, seniors are turning to reverse mortgages to help fund their retirement. Today, thanks to new federal legislation, the elderly can get bigger mortgages with smaller origination fees, making reverse mortgages a smart, practical option for cash-poor, house-rich seniors. 

What is a reverse money mortgage?
It’s a loan against your home that you don’t have to pay back as long as you continue to live in your home. In short, the lender advances you the equity you have locked up while you continue to live there, usually in monthly payments from the bank.

How much money can you get?

  • The older you are, the bigger the loan: The amount of cash you can get depends on your age, usually your home’s value and the reverse mortgage plan you choose. The oldest borrowers with the most expensive homes get the biggest loans.

  • Take the money as you like it: There are different ways to take the money; you can take one lump sum,  monthly payments over a fixed period of time, or as a line of credit to use when you want.

  • You make no monthly payment: Unlike a traditional mortgage, you make no monthly payments while you live in your home, and with the new FHA’s Home Equity Conversion Mortgage (HECM), you can move to a nursing home or other medical facility for up to 12 consecutive months before the loan must be repaid.

  • New loan limit raised to $625K: HUD recently increased limits on federally insured reverse money mortgages to $625K for this year. Next year it might revert back to $417K. Lender fees are now capped at $6,000 regardless of the size of the loan, so borrowers can get more money for lower fees. The government is losing money on this program and, as reverse mortgages become more popular, federal fees will go up as the loan amounts are lowered. 

  • You still pay property taxes: You’re still responsible for property taxes, insurance and home repairs. In fact, making certain repairs and maintaining your home can be a requirement of the loan.

  • Lender can’t cancel: Unlike a home equity line of credit, the proceeds from a reverse mortgage can’t be frozen or canceled. 

Who’s eligible?

  • 62 years or older: Borrowers must be 62 years or older. That means each owner of the home must be 62 or older.

  • There’s no income restriction
  • Must have wiggle room: You must own your home outright, or have a low mortgage balance. Any mortgage balance is paid off at closing with proceeds from the new reverse loan.

  • Owe the lender nothing: It must be your primary residence. Reverse mortgages are also available on 2- to 4-unit properties, condos, co-ops, planned unit developments and prefab homes. Mobile homes are not eligible.

What happens when/if someone dies?

  • The loan is repaid in full, including all interest and other charges, when the last living borrower dies, sells the home or moves away. Any remaining equity in your home belongs to you or your heirs.

  • Most lenders in the industry automatically allow 90 to 180 days if the heirs opt to sell the home. They’re sensitive to the market and don’t want to lose money in a rushed sale.  Lenders cannot look to other assets of the borrower or the heirs to repay the loan.

  • Reverse money mortgages typically have a “nonrecourse” clause, which means you and your estate will never owe more than what your home is worth.

The key questions to ask

  • Is a reverse mortgage your best option? If you have the income and credit rating to qualify for a traditional mortgage, it may be a better option. If you need only a small amount for a short time, try taking a home equity line of credit. If you need a large amount, you might consider moving to a less expensive property instead.

  • How long do you expect to stay in your house? The right answer is “at least seven years.” Reverse money mortgages become less expensive over time; the longer you live, the cheaper they are.

  • What payout is best for you? Unless you need the money right away, it’s best to opt for installment payments since the money you take starts accumulating interest immediately.

  • How will you use the money? It’s pretty much always a bad idea to use a reverse mortgage to pay for a vacation or a risky investment.

  • Do you want to spend all of the home’s equity, or leave some equity for your kids? As you stay in your home, your debt can grow to equal the value of the house and your heirs won’t receive a thing.

The pitfalls to watch out for

  • Reverse money mortgages are expensive up front: The hefty government insurance fee, 2 percent of the value of your home (as opposed to the amount of the loan), is the bulk of the cost. Origination fees are capped at $6,000 on a HECM loan. So closing costs can be as high as $12,000 on a $150,000 loan. 

  • The loans require a lengthy application process: And also a photo ID, which many seniors who don’t drive, don’t have.

  • Never draw more than you need: Unscrupulous lenders sometime urge you to take a larger sum when liquefying the net worth of your house, putting higher fees in their pocket. Take out only the amount you need each month and leave the rest on an equity line of credit that is still available to you at any time.

  • Reverse mortgage proceeds can impact Medicaid eligibility: The money you take should be used immediately, since any funds remaining in your bank account at the end of the month can count as liquid assets. If your liquid assets exceed your Medicaid limits, you can be denied your Medicaid benefits. Reverse mortgage money generally doesn’t affect your Social Security or Medicare benefits.
  • Lock your rates in between the time you apply for the loan and the time it closes: It sometimes takes 120 days to process the loan and the amount of money you can qualify for can change dramatically before the loan closes.

  • Be wary of sales pitches: You don’t have to buy any products or services to get a reverse mortgage, except the counseling required for an HECM can be had at little or no cost. If you don’t understand the cost or features of the mortgage being offered or if you feel pressured to finalize the deal, walk away.

  • Your right to cancel: You usually have at least three days after closing to cancel the deal for any reason without penalty, but you must notify the lender in writing. Send your letter by certified mail, return receipt requested, to document your correspondence.  After you cancel, the lender has only 20 days to return any money you’ve paid up to that point.

Where to find help

  • The AARP Foundation’s Reverse Mortgage Education Project: Visit www.aarp.org/money/revmort for more information on reverse mortgages and a reverse mortgage calculator to help you get loan estimates.

  • The Department of Housing and Urban Development: Visit www.hud.gov and search “reverse mortgage” to find more information on the FHA’s reverse mortgage, reverse mortgage lenders and HUD-approved reverse mortgage counselors.
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