With the current Social Security crisis, many are concerned about how long their benefits will really last. Add to that a genuine concern about whether or not they have saved and invested enough for retirement and you can certainly understand the stress level of the 41 million people who are now in their 50s and 60s.
Television ads across the country have introduced the term “reverse mortgage” into the lexicon of many Americans. But exactly how they work remains a mystery. It is also questioned how risky they are for seniors who sign up. This article is a short course on what exactly they are and how they work:
- Where does the Reverse Mortgage come from?
Federally insured ‘home equity conversion mortgages’ (also known as ‘reverse mortgages’) emerged in 1989. However, while many seniors with qualified home equity are entitled to use them, they are estimates that only about one percent of those qualified have put them in place. Most of the growth that has occurred in the home equity conversion mortgage market has occurred in recent years.
- How exactly does it work?
First, to qualify you must be 62 years of age. Second, the house you live in must be your ‘primary residence’ and the amount of equity you have in the house is key. Basically, the higher the appraised value of your home and the older you are, and the lower the interest rate on your current mortgage, the higher the amount you qualify for.
The amount you can receive is flexible. For example, you can get a lump sum amount or, if you prefer, a line of credit that will be used when you need it, or a monthly payment that will be made to you over a set period of time (fixed term), or a combination of all. the above.
There are no loan payments to make, so the threat of foreclosure is not a possibility. However, you must keep your property taxes and homeowners insurance up to date and, of course, you must maintain the property so that it does not deteriorate and lose value.
The reverse mortgage only matures and is payable when you eventually sell your home, or reside elsewhere for more than a year, or die (or the last surviving borrower dies). At the time of his death, his heirs reimburse the lender for the money raised from the sale of the house.
- What about math?
The reverse mortgage uses an appraised value for the home, which has a “cap” on median home value for your particular county in the state in which you reside. The Fannie Mae-sponsored ‘Home Keeper’ program was at $417,000 (and could still be). Of course, if the appraised value of her house is even higher, she can borrow an amount up to the allowable limit.
To save on increased interest charges, the lump sum is probably not a good idea. Better would be the option to take monthly payments or a line of credit. The well-known national association did a study that looked at this example: a 74-year-old borrower with a $300,000 home would pay about $15,000 more in down-front costs (over the life of the loan) and another $15,000 in monthly costs. insurance premiums and service fees throughout the life of the loan. Many financial planners point out that interest owed (paid after your death) is not tax deductible and the longer the term of the loan (the longer you live) the greater the amount of interest due.
- What are safety valves?
First, you can’t get a reverse mortgage without going through a review. Under federal law, when considering a reverse mortgage and before applying for the loan, you are required to consult with a HUD-approved counselor, either by phone or in person. Second, the math has to work. If your home’s appraised value is too low compared to the mortgage you have now, you won’t qualify. On the other hand, if your equity-to-value ratio is favorable, you are likely qualified (after meeting with a HUD-qualified counselor).
- Consider your options carefully
There is a custom analytics template you may want to consider. You can use an online calculator to enter your age, the approximate value of the home, and the ZIP code where the home is located (to see if your home is below the FHA limit in your county). The template then calculates your options, which can be sorted by loan amount or interest rate. To find the calculator online, go to www.goldengateway.com and see if the numbers work for your situation.