Millions of retirees face financial challenges as they try to make ends meet when their income drops. For many seniors, the equity they have in their home is their largest untapped asset, yet they don’t want to make the dramatic decision to sell their family home in order to access the equity that they’ve built up over the years. Many seniors prefer to remain in their home as they consider alternative ways to gain access to much-needed income.
Reverse mortgages promise to give retirees an easy way to access their home equity, but there are technicalities that you should understand before you consider taking out a Reverse Mortgage for that purpose.
What is a Reverse Mortgage?
One of the most confusing aspects of reverse mortgages is the terminology involved. In its traditional form, a reverse mortgage involves making an arrangement with a lender in which the lender makes monthly payments to the borrower in return for full or partial ownership of the mortgaged house. Reverse Mortgages have different payment arrangements. One alternative allows you to take payments for as long as you’re alive and remain in the home. Others allow you take payments for a fixed number of years, in a lump sum, or at a time of your choosing via a line of credit. The option that you choose will affect how much you’re able to borrow — in general, the percentage of home equity that can be borrowered will be higher for older seniors and lower for those at or near the minimum required age of 62.
The Federal Housing Administration’s government-insured reverse mortgage program uses private lenders to extend reverse mortgage loans. The primary benefit of a FHA reverse mortgage is that as long as the borrower remains in the home as his principal residence, the loan doesn’t come due. Only after the borrower dies, sells the home, or moves elsewhere does the reverse mortgage become due. In addition, if the outstanding loan amount exceeds the value of the home, the government will cover the difference so that the lender is protected.
Reverse Mortgage Costs
If you take out a Reverse Mortgage you pay between 0.5% and 2.5% of your loan amount as a mortgage insurance premium. Every subsequent year you pay another 1.25% of the outstanding mortgage balance which covers insurance costs. Lenders may charge origination fees of as much as $6,000 including charges of up to $2,500 for the first $125,000 of value, 2% of the next $75,000 and 1% of any value above $200,000. There are also monthly servicing fees which can add $30 to $35 to the cost of a Reverse Mortgage.
You can incorporate these costs into the loan so you don’t have to pay them out of pocket. This, however, reduces the amount that’s available to you to borrow or receive in monthly payments.
Borrowers must continue to live in the home. When a married couple is listed as borrowers on a reverse mortgage, their joint life expectancies may result in reduced payments if one partner is significantly younger than the other partner. Some homeowners choose to list just one family member on the reverse mortgage but if the borrower dies or requires long-term care outside the home, the spouse is no longer eligible to receive the Reverse Mortgage payments (although the spouse can continue to live in the home).
Reverse mortgages can be complicated but they also offer a way for seniors to tap into their home’s equity in a way that’s consistent with the typical retiree’s lifestyle. Borrowers who are prepared for the potential issues generally find that a reverse mortgage can be a great solution day-to-day needs, while providing them with the opportunity to continue to live in their home.