Reverse Mortgages

In a past article we explored a trend for elderly parents living with their children while maintaining separate quarters in our article “Is a Granny Pod In Your Future.” However, there are many parents that don’t want to leave their house. Whether it is a feeling of a loss of freedom, becoming a burden or just being comfortable and happy where they are, they want to stay in their house.

house on moneyWith property taxes, medical expenses and utilities all increasing rapidly, some older home owners find that they need financial help to stay in the home they love. Reverse Mortgages were designed to use the equity build up in a lifetime in a home to help them stay in it.

Reverse Mortgages have been around since the 1960’s, although originally they were available from a few private companies. The Federal Government first got involved with Reverse Mortgages in 1987 when it authorized HECM’s (Home Equity Conversion Mortgage) through HUD. The first HUD insured HECM was processed in 1989. Originally it was set up as a temporary program limited to 2,500 loans. However, in 1998 it was turned into a permanent program.

The growth of reverse mortgages was slow at first and it wasn’t until 2008 that the annual number of these mortgages surpassed 100,000.  There were a total of 493,815 active HECM insured loans by May 2010, which accounts for approximately 90% of all reverse mortgages.

A reverse mortgage is designed for seniors to access the equity in their house to help cover expenses, make upgrades or whatever else funds are needed for while still being able to stay in their homes. Unlike a conventional mortgage or equity loan, there is no monthly payment to the home owner. Instead the loan has to be paid off after the owners no longer occupy the house or if they default on the loan by not paying property taxes and insurance. The homeowner has five different ways they can receive their funds. HUD identifies them as follows:

  • Tenure– equal monthly payments as long as at least one borrower lives and continues to occupy the property as a principal residence.
  • Term– equal monthly payments for a fixed period of months selected.
  • Line of Credit– unscheduled payments or in installments, at times and in an amount of your choosing until the line of credit is exhausted.
  • Modified Tenure– combination of line of credit and scheduled monthly payments for as long as you remain in the home.
  • Modified Term– combination of line of credit plus monthly payments for a fixed period of months selected by the borrower.

The amount of money that a home owner can receive varies based on several factors; The appraised value of the home, the age of the youngest owner, interest rates, and the program you choose HECM Standard or HECM Saver (saver requires lower Initial Mortgage Insurance premium, but has a loan with a lower percentage of the home’s value). The minimum age for this loan is 62 and the older the borrower the higher percentage of equity can be utilized.

As a protection to elderly every person that applies for the loan must first receive consumer information from a HECM counselor prior to obtaining the loan. The counseling is offered for free or at very low-cost. As with any loan there are positives and negatives to the loan, and the counseling is designed to highlight both so homeowners can have a complete understanding of the risks and rewards.

This loan is not for everyone, but it may just help some people stay in their home or allow them to live a more comfortable life for their remaining years.

Here are links to additional reading on the subject:

Frequently Asked Questions on HUD’s Reverse Mortgages

National Council on Aging’s Use Your Home to Stay at Home

AARP’s Are Reverse Mortgages Risky?

AARP’s 10 Things You Should Know About Reverse Mortgages.

 

One Response to “Reverse Mortgages”

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