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Volume 1; January 2004 – Educational Series
Until recently, there were two main ways to get cash from your home: you could sell your home, but then you would have to move; or you could borrow against your home, but then you would have to make monthly loan repayments.
Today there are “reverse mortgages” available to you. A reverse mortgage is a loan against your home that you do not have to pay back for as long as you live there. With a reverse mortgage, you can turn the value of your home into cash without having to move or repay a loan each month. A reverse mortgage allows a senior citizen to be able to “continue to live independently, and comfortably, right where they are,” said Peter Bell, president of the Reverse Mortgage Lenders Association.
Selling and Moving
The single best way to evaluate a reverse mortgage is to compare it to what may be your only viable option: selling your home and using the proceeds to buy or rent a new home.
Do you know?
- How much cash could you get by selling your home?
-What it would cost you to buy, maintain, and/or rent a new home?
- How much money could you safely earn on any money left over after you buy a new home?
Have you recently looked into buying a less costly home, renting an apartment, or moving into assisted living or alternative housing?
Most likely you will come to one of two conclusions:
- You may find another housing option that is a lot more attractive than you thought.
- You may confirm what you were fairly certain of all along: that where you live now is the best place for you to be.
No matter what you conclude, you will have a much better idea of the overall costs and benefits of staying versus moving. You will get a better sense of what is important to you and it should be easier for you to evaluate the comparative costs and benefits of a reverse mortgage.
Loan Proceeds
The loan proceeds from a reverse mortgage can be paid to you in several ways:
- All at once, in a single lump sum of cash.
- As a regular monthly cash advance.
- As a “credit line” account that lets you decide when and how much of your available cash is paid to you.
- As a combination of these payment methods.
Three Major Types of Reverse Mortgages:
Single Purpose reverse mortgages can be used in only a specific way. Some can be used only to make home repairs or improvements while others must be used to pay property taxes or special assessments. These loans are not available in all areas and are typically offered by state and local government agencies. The restrictions on these loans mean that they generally provide less total cash than the other types of reverse mortgages.
Federally Insured reverse mortgages are also known as Home Equity Conversion Mortgages (HECM). These loans can be used for any purpose, and are available throughout the United States to homeowners age 62 and over, regardless of income. HECMs offer the widest array of loan advance choices, while providing greater total cash advances.
HECMs are backed by the Federal Housing Administration (FHA) and are offered by banks, mortgage companies, and other private sector lenders. They are federally insured, which means the U.S. Government guarantees that HECM borrowers will get all the cash advances promised them.
Proprietary reverse mortgages are almost always the most expensive type of reverse mortgage. They generally provide larger loan advance amounts only if your home is worth a lot more than the average home value in your county. These mortgages can be used for any purpose and generally provide most types of loan advances. These loans are offered by banks, mortgage companies, and private lenders and are backed by the private companies that develop them. These loans are not federally insured.
Costs
Almost all the costs of a HECM can be financed, that is, they can be paid from the proceeds of the loan. Financing the upfront costs reduces the net loan amount available to you, therefore, reducing your immediate out-of-pocket cost.
Common reverse mortgage costs are as follows:
Origination Fees: Pays a lender for preparing your paperwork and processing your loan.
Closing Costs: These are the costs incurred by third parties that are necessary to close the contract. These services include an appraisal, a title search, insurance, a survey, inspections, recording fees, mortgage taxes, and credit checks.
Insurance Premium: This premium guarantees that you will receive your promised loan advances and will not have to repay the loan for as long as you live in your house.
Servicing Fees: Servicing a loan means everything lenders or agents do after the closing to monitor your compliance with your obligations under the loan agreement.
Interest Rates: All lenders charge adjustable interest rates on HECM loans. This means that the rates can increase or decrease over time. Lenders do not have any control over what the rate will be when the loan closes, or how it will change over time.
Conclusion
The information we have presented here is designed to introduce you to the different types of reverse mortgages that are available. If you are interested in pursuing a reverse mortgage, you should contact a bank or lending institution and request literature on the various mortgages offered. Review all of the specific requirements for the loan and ask for a good faith estimate of the costs and fees involved before you sign for the loan.
DMCC is a 501 (c)3 is a charitable organization committed to educating consumers on financial issues and providing personal assistance to consumers who have become overextended with their debt. Education is provided free of charge to consumers as well as personal counseling to identify the best options for the repayment of any unsecured debt. To speak to a certified credit counselor, call 1-954-418-1466, email contact@dmcconline.org.
DMCC is located at 700 West Hillsboro Blvd., Building 1, Suite 105, Deerfield Beach, FL 33441.
