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The TV advertisements make Reverse Mortgages sound like a no-risk opportunity to access money in which your home equity can finance your retirement. According to this view, taking out a HECM loan will enable you to stay in your home without ever making a payment.
What the ads forget to mention is a Reverse Mortgage is not quite that simple. While it is a great way for retirees to age in their homes, the mortgage can cause complications when the borrower doesn’t fully understand the loan or his or her responsibilities.
A reverse mortgage allows a homeowner age 62 or older to withdraw up to 65 percent of the equity in his or her property. The money can be taken as needed with a line of credit, in monthly payments or some combination of these two options. No payments are required until the last borrower dies, sells the house or is has left the house.
The program is not as straightforward as it sounds. Recently Congress has added consumer protections but it’s still easy for unsophisticated seniors to be misled
Before you take out a Home Equity Conversion Mortgage it’s crucial to know what you’re getting into.
The most important thing to remember is that the Reverse Mortgage involves costs and obligations:
- There is an origination fee ($0 to $6,000) in addition to the normal mortgage refinancing closing costs.
- Borrowers pay an upfront cost for private mortgage insurance (0.5 percent or 2.5 percent of the appraised value of the home).
- Potential borrowers are assessed a one-time fee of about $125 for mandatory counseling (many senior rights organizations offer free or discounted counseling)
- There is a yearly mortgage insurance fee (1.25 percent of the amount borrowed every year) and servicing costs of approximately $30 to $35 a month.
More than 90% of reverse mortgages today are issued through the Federal Housing Administration’s HECM program. The mortgage insurance amount is set by the FHA so that will be the same no matter which lender you use.
Other charges, such as the origination fee, which is capped at $6,000, and the loan’s margin, are negotiable. Financial advisors caution potential Reverse Mortgage borrowers that it’s important to shop around to ensure that they get the best deal. Listen to each lender’s proposal for his institution’s the interest rate, origination fees and other fees. Pay special attention to the proposed margin – many lenders will not volunteer that information unless asked.
Demonstrating past financial solvency and a good credit record are one way of pressuring a lender to give you the best deal possible. Other tips for people considering a Reverse Mortgage include:
Put both partners on the title and on the mortgage since, once the last person on the mortgage dies or is absent from the property for 12 months, the mortgage becomes due.
Review your entire financial picture to make sure that you’ll be able to keep up with the insurance payments, property taxes, home maintenance and other loan costs if you take out a HECM loan. You might wish to create a set-aside fund to ensure that the loan costs will always be covered to protect your interests.
If the lender tries to sell you other products, find another lending institution. The Department of Housing and Urban Development reminds seniors that such practice is illegal. However, there are still cases in which unscrupulous lenders have encouraged seniors to take out reverse mortgages and use the proceeds for risky annuities. It’s not a good idea to take financial advice from someone who is motivated by a commission.
Discuss the Reverse Mortgage option with a financial planner who doesn’t benefit in any way by your decision. The Reverse Mortgage can only be approved if the couple has attending a counseling session with a HUD-approved counselor, but it’s still a good idea to sit with a financial consultant and discuss your income sources and economic situation before making a decision about the Reverse Mortgage loan. Senior-rights organizations often provide free financial counseling for retirees.
Consider how you want to draw your money. You have the option of receiving monthly payments or a line of credit or a combination of the two. For most people, the line of credit is the best option because you only draw on it if you need it. The unused portion sits in your account and continues to draw interest. In specific cases you may receive permission to access your funds in a lump sum but if you take more than 60% of the principal limit upfront, you’ll be charged 2.5% of your home’s appraised value in mortgage insurance upfront rather than 0.5%.