Good things often get better with age, and for many Americans, retirement can be the most enjoyable years of their lives. Not only does it provide you with time to relax, unwind and pursue new dreams, but also the opportunity to reconnect with your spouse and family—unless you’re faced with financial worries. Fortunately, a reverse mortgage can restore shine to the golden years of cash-strapped seniors. According to the Consumer Financial Protection Bureau (CFPB), lenders originate about 70,000 of them annually—and they expect that number to increase.
Reverse Mortgage Basics
The most common reverse mortgage programs are the Federal Housing Administration’s Standard and Saver Home Equity Conversion Mortgages (HECM). These are special loans designed for senior homeowners that enable you to convert a portion of your home equity into cash. The proceeds of the loan do not need to be repaid until you sell, move or your heirs inherit—in which case your estate has six months to settle the balance. Should they choose to sell instead, the lender absorbs the loss if the home goes for less than the amount owed. If it sells for more, they will inherit the difference.
Reverse Mortgage Requirements
To qualify for a reverse mortgage, at least one homeowner must be 62 years old. You must own your home outright or have enough equity to pay off the previous mortgage balance with the proceeds. While there are no income or credit score requirements, you may only take a reverse mortgage on your primary residence. This means you must live on the property for the majority of each year. You must also keep up with property tax and insurance payments as well as maintain the home’s condition.
Reverse Mortgage Proceeds
The amount you’ll receive from your reverse mortgage depends on a number of factors including your age, your appraised home value, the current interest rate and the program’s lending limits. For example, older seniors with more valuable homes usually receive more. Those who choose the HECM Saver program will receive less than those who choose the HECM Standard as the former has lower lending limits in exchange for lower fees. Regardless of program, you can take your disbursement as a lump sum at time of closing, as equal monthly payments for a fixed number of years, or as a line of credit.
Reverse Mortgage Costs
Reverse mortgages are quite expensive, with substantial upfront costs and higher interest rates than those you’ll find on purchase loans. While the upfront mortgage insurance premium on the HECM Saver is lower than that of the HECM Standard, other fees are comparable between programs. That said, you should shop several lenders to secure the lowest origination and servicing fees, closings costs and interest rate for the program you choose.
Other Important Considerations
Before obtaining a reverse mortgage, consider your age. According to the CFPB, more seniors are taking out reverse mortgages at younger ages. Unfortunately, doing so increases the risk that you will owe more than home is worth if you fall on hard times and need to sell. This can result in foreclosure. Additionally, if your spouse is younger than 62, make sure you can add him or her to the mortgage once he or she reaches the required age. If you are unable to do so, the reverse mortgage will become due when you die, leaving your spouse holding the bag.
A reverse mortgage should be a last resort as part of a broader financial strategy. Consider other options including downsizing, a home equity loan or a cash-out refinance before making your decision. If you choose one of the HECM programs, you will receive counseling prior to closing. While the opinions of the counselor should be unbiased, it would be wise to consult a trusted financial advisor before signing on the dotted line.
