Ask the Expert
The Reverse Mortgage Option
Think you have to sell to draw money from your home?
As the cost of daily expenses continues to rise and your assets fall, you may be tempted to sell your home for cash. To avoid the stress of a home sale and move, however, you should consider another option financial institutions and banks offer that allows you to use the equity in your home without having to move—it’s called a reverse mortgage.
What is a reverse mortgage?
It’s a type of home equity loan in which the direction of payments is reversed: The lender pays the borrower rather than the other way around. The borrower can receive the funds as a lump sum payment, a line of credit, or monthly payments for as long as they live in the home, or any combination of these choices.
Some programs offer monthly payments for a specific period, while others combine an annuity to offer monthly payments for life, no matter where the borrower lives. Borrowers continue to hold the title to the home, so they do not give up homeownership.
They can remain in the home for the rest of their lives, should they choose to do so. No repayment is required until the borrower permanently vacates the home.
Unlike other types of home equity loans, a reverse mortgage was specifically designed to meet the needs of seniors: the need for additional money with no payments; the need to meet the loan qualifications, even with no income or less than perfect credit; and the need for a permanent place to live, to name a few.
How can I get one?
To qualify, the borrower must be 62 years of age or older and must be living in the home. There are no credit or income requirements. Instead, the mortgage must be paid off; if there is debt against the home (e.g., an existing home equity loan or open home equity line of credit), the borrower can use a cash advance from the lender to settle the debt.
For the borrower’s protection, each borrower must receive educational mortgage counseling from an approved counselor before applying for the loan.
Are there downsides?
While reverse mortgages can be a good option for seniors, they are not for everyone. You should consult your tax advisor regarding your individual financial situation and estate planning needs, especially if you have plans to leave your home to children or other relatives.
You should be aware that fees on reverse mortgages have been capped by the recently enacted Housing and Economic Recovery Act of 2008. Don’t be talked into overpaying—a number of seniors have inappropriately and sometimes fraudulently been pressured into other financial products as a condition of being approved for a reverse mortgage. The law restricts this practice.
The Federally Insured Reverse Mortgage Loan
The federal government, through the U.S. Department of Housing and Urban Development (HUD), offers a reverse mortgage called the Home Equity Conversion Mortgage (HECM). Monies from a HECM can be used for the same living expenses as a regular reverse mortgage. The major differences from a regular reverse mortgage are:
- The federal government is guaranteeing the loan.
- The loan amount may be limited in the county in which you reside. However, if the residence is not an expensive home, most consumers will receive the greatest benefit with a HECM.
To obtain an HECM, you must:
- Be 62 years old or older.
- Own your home or have a low mortgage balance that can be paid off with proceeds from the HECM loan.
- Live in the home as the primary residence.
- Complete a HECM counseling session with a HUD-approved HECM counselor.
Your property must meet the highest state/local code or HUD’s minimum property standards. Eligible types of homes include:
- Single family detached homes.
- Two- to four-unit single family homes with one unit occupied by the borrower.
- Manufactured homes and condominiums that meet HUD/FHA guidelines.
Additional information can be obtained by calling a HECM counselor at 1-800-569-4287 or visit their Web site.