Tuesday October 27, 2020
What is a Reverse Mortgage?
Massive job losses, a volatile stock market and low interest rates caused by the coronavirus pandemic have caused many cash-strapped retirees to consider a reverse mortgage. But there are many things to consider to be sure it is a good option for you now.
A reverse mortgage is a unique type of loan that allows older homeowners to borrow money against the equity in their house (or condo). To be eligible for a reverse mortgage, you must be 62 years of age or older, own your own home (or owe only a small balance) and currently be living there.
The loan does not have to be repaid until the homeowner dies, sells the house or moves out for at least 12 months. At that point, you or your heirs will have to pay back the loan plus accrued interest and fees.
It is also important to understand that you, not the bank, owns the house. You are still required to pay the property taxes and homeowners insurance. If you do not pay, you may face a foreclosure.
You will need to undergo a financial assessment to determine whether you can afford to continue paying your property taxes and insurance. Depending on your financial situation, you may be required to put part of your loan into an escrow account to pay future bills. You will likely be denied a reverse mortgage if the financial assessment finds that you cannot pay your insurance and taxes and have enough cash left to live on.
Around 95% of all reverse mortgages offered are Home Equity Conversion Mortgages (HECM), which are FHA insured and offered through private mortgage lenders and banks. HECMs have home value limits that vary by county, but cannot exceed $765,600 in 2020.
The loan amount you can receive through a reverse mortgage depends on your age (the older you are the more you can get), your home's value and the prevailing interest rates. Generally, most people can borrow somewhere between 50% and 60% of the home's value. To estimate how much you may be able to borrow, you can use an online reverse mortgage calculator. The loan amount can be paid as a lump sum, a line of credit, regular monthly checks or a combination of these.
Beware! Reverse mortgages are not cheap. HECM loans require a 2% upfront mortgage insurance payment, plus an additional 0.5% annual charge, in addition to origination costs and lenders' fees. Any amount you borrow, including these fees and insurance, accrues interest, meaning your debt grows over time.
To learn more, read the National Council on Aging's online booklet "Use Your Home to Stay at Home" at NCOA.org/home-equity.
Also note that because reverse mortgages are complex loans, all borrowers are required to get counseling through a HUD approved independent counseling agency before taking one out. Most agencies charge between $125 and $250 for the counseling. To locate one near you, visit Go.usa.gov/v2H, or call 800-569-4287.
If you have a short-term need for cash, there are other options you may want to pursue. For example, many low-income seniors do not realize they qualify for the Earned Income Tax Credit, a refundable tax break that can put cash in your pocket. You also could use BenefitsCheckUp.org to search for financial assistant programs you may be eligible for.
A charitable alternative to a reverse mortgage is combining a life estate reserved with a charitable gift annuity. You would receive an immediate charitable income tax deduction and charitable gift annuity payments for the rest of your life at an attractive fixed rate.
To create a charitable gift annuity using your home, you would deed your home to a charitable organization as a remainder interest and retain a life estate. The life estate deed would provide you the right to use your home for the rest of your life. You will be required to maintain the property in good condition and pay the property taxes and homeowners insurance with this option as well. When you pass away, the home would belong to the charitable organization and will benefit the charitable mission of that organization.
Another possibility is a regular home equity loan or line of credit. This type of borrowing requires you to make regular payments. Lenders can freeze or lower limits on lines of credit, but the borrowing costs are much lower.
Savvy Living is written by Jim Miller, a regular contributor to the NBC Today Show and author of "The Savvy Living" book. Any links in this article are offered as a service and there is no endorsement of any product. These articles are offered as a helpful and informative service to our friends and may not always reflect this organization's official position on some topics. Jim invites you to send your senior questions to: Savvy Living, P.O. Box 5443, Norman, OK 73070.