Is a reverse mortgage right for me?

For most homeowners their house is a major part of their overall financial picture. Unfortunately, for retired homeowners who may have limited sources of income, the equity in their house may seem to be one of their only potential sources of additional money for everyday living expenses and healthcare. It can be tempting to borrow from the home in order to access that equity.
 
A reverse mortgage or HEMC (Home Equity Conversion Mortgage) is a way for seniors age 62 or older to borrow against a portion of the value of their home. However instead of making monthly payments to a lender, the borrower receives monthly payments or one lump-sum payment. While the money borrowed will eventually have to be repaid, with interest, repayment will not come out of the homeowners’ pocket as long as they live in the house and keep up with other obligations such as paying property taxes and insurance as well as maintaining the home. The loan, with interest, will need to be repaid when the borrower or his or her heirs sell the house.
 
One criticism of the standard HECM is the upfront cost related to the loan. One major requirement of  HECMs is that potential borrower must first talk to a HUD-approved counselor. The counselor will review the implications of receiving a reverse mortgage including repayment options and alternatives to an HECM loan. There are several alternatives to a reverse mortgage that should be reviewed before moving forward. One alternative is a second mortgage, which is a loan for a fixed amount of money, for a fixed amount of time, and at a fixed rate of interest. Another option may be a home equity line of credit, which offers a revolving line of credit from which the homeowner can borrow money, repay it over time, and then borrow again.
 
No matter what kind of loan you consider, experts generally recommend talking to a financial advisor and qualified housing counselor. The pros and cons of borrowing against a home in retirement depend on several factors, including a person’s income, savings and short- or long-term housing goals. For example, if you need to move into a retirement community, you will be required to either pay back the loan balance from savings or sell your home to repay the loan. Also, interest charged on a reverse mortgage adds to the total loan balance, which means your loan balance will go up over time which may wipe out the equity in your home when it is sold, leaving little or no proceeds from the sale. Experts generally say that homeowners who don’t plan to stay in a home more than five years should explore alternatives to reverse mortgage loans.
 
Reverse Mortgage Borrower Requirements
You must:

• Be 62 years of age or older
• Own the property outright or paid-down a considerable amount
• Occupy the property as your principal residence
• Not be delinquent on any federal debt
• Have the financial resources to continue to make timely payment of ongoing property charges such as property taxes, insurance and Homeowner Association fees, etc.
• Participate in a consumer information session given by a HUD- approved HECM counselor

Property Requirements
The following eligible property types must meet all FHA property standards and flood requirements:

• Single family home or 2-4 unit home with one unit occupied by the borrower
• HUD-approved condominium project
• Individual Condominium Units that meet FHA Single Unit Approved requirements
• Manufactured home that meets FHA requirements

Financial Requirements

• Income, assets, monthly living expenses, and credit history will be verified.
• Timely payment of real estate taxes, hazard and flood insurance premiums will be verified

HECM Costs

• Mortgage Insurance Premium
  You will incur a cost for FHA mortgage insurance. The mortgage insurance guarantees that you will receive expected loan advances. You can finance the mortgage insurance premium (MIP) as part of your loan.
• Third Party Charges
  Closing costs from third parties can include an appraisal, title search and insurance, surveys, inspections, recording fees, mortgage taxes, credit checks and other fees.
• Origination Fee
  You will pay an origination fee to compensate the lender for processing your HECM loan. A lender can charge the greater of $2,500 or 2% of the first $200,000 of your home's value plus 1% of the amount over $200,000. HECM origination fees are capped at $6,000.
• Servicing Fee
  Lenders or their agents provide servicing throughout the life of the HECM. Servicing includes sending you account statements, disbursing loan proceeds and making certain that you keep up with loan requirements such as paying real estate taxes and hazard insurance premium. Lenders may charge a monthly servicing fee of no more than $30 if the loan has an annually adjusting interest rate or has a fixed interest rate. The lender may charge a monthly servicing fee of no more than $35 if the interest rate adjusts monthly. At loan closing, the lender sets aside the servicing fee and deducts the fee from your available funds. Each month the monthly servicing fee is added to your loan balance. Lenders may also choose to include the servicing fee in the mortgage interest rate.

For additional information on reverse mortgages visit: https://www.consumer.ftc.gov/articles/0192-reverse-mortgages