Are Reverse Mortgages a Viable Option for Older Americans?

Reverse mortgages are special types of home loans that enables the borrower to convert a portion of his home’s equity into cash. Unlike traditional home equity loans, repayment is not required until the borrower moves or dies. Reverse mortgages are garnered by the FHA through its Home Equity Conversion Mortgage program.

Qualifications for these reverse mortgages include: the homeowner needs to own the home outright or have a low mortgage balance that can be paid off with the proceeds from the loan, the homeowner must be at least 62 years of age, and the home must be the primary residence of the homeowner. HECM counseling is also a requirement of the financing process to make sure the homeowner understands the process, is really in need of the reverse mortgage, and can afford to stay in the home even after loan approval.

There has been a change to the HECM rules, though. There are a couple of options that are now available. One is the HECM Standard option and the other is HECM Saver option. The saver option can cut the initial insurance premium, which is one of the biggest costs associated with these types of loans, from 2% of a home’s value, which is the current HECM Standard option, to 0.01% of the home’s value.

In addition to the new HECM option, many lenders are also cutting deals on fees. Fees can potentially add up quickly. For example, origination fees can be as much as $6,000 and closing costs are also required, which includes appraisal and title insurance fees. These potentially high upfront fees have previously stymied interest in these types of loans. Lenders, though, are now more than likely to pay at least half of the initial premium and waive origination fees.

The choice between the types of loans can be complicated, though. Monthly payment options are available as well as getting a lump sum, at a variable or fixed rate. Another option is a variable rate credit line. The new HECM Saver constitutes another hurdle in which the amount that can be borrowed normally is lower than with an HECM Standard loan. For example, a 65 year old in a paid off $300,000 home could net only $146,000 with an HECM Saver but can net about $182,000 with a traditional loan or an HECM Standard loan. Of course, these numbers are relative to the area lived in as well.

Further, if the option of receiving payments is chosen, the process can become even more complicated because there are currently five options available. These are Tenure, Term, Line of Credit, Modified Tenure, and Modified Term. The Tenure option is set as equal monthly payments as long as the borrower continues to live on the property for as long as the borrower lives. The Term option is basically equal monthly payments for a fixed period of months. A Line of Credit is just that, unscheduled payments in the amounts chosen by borrowers until the line of credit is exhausted. Modified Tenure includes a line of credit along with fixed monthly payments. Modified Term is a line of credit with monthly payments for a fixed period.

Susan Redfield - Real Estate Broker at BankOwnedProperties.org