Dear Savvy Senior: What can you tell me about reverse mortgages for retirees? My wife and I are contemplating getting one. — Running Short
Dear Running: For retirees who own their home and want to stay living there, but could use some extra cash, a reverse mortgage is a viable financial tool.
A reverse mortgage is a type of loan that allows older homeowners to borrow money against the equity in their house (or condo) that doesn’t 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.
With a reverse mortgage, you, not the bank, own the house, so you’re still required to pay your property taxes and homeowners insurance. Not paying them can result in foreclosure.
To be eligible, you must be 62 years or older, own your own home (or owe only a small balance) and be living there.
You will also need to undergo a financial assessment to determine whether you can afford to continue paying your property taxes and insurance. If the financial assessment finds that you cannot pay your insurance and taxes and have enough cash left to live on, you’ll be denied.
Around 95 percent of all reverse mortgages offered today are Home Equity Conversion Mortgages, which are FHA insured and offered through private mortgage lenders and banks. These loans have home value limits that vary by county, but cannot exceed $679,650.
How much you can actually get depends on your age (the older you are the more you can get), your home’s value and prevailing interest rates. Most people can borrow between 50 and 65 percent of the home’s value. To estimate how much you can borrow, visit ReverseMortgage.org.
Fees have increased for reverse mortgages including: a 2 percent lender origination fee for the first $200,000 of the home’s value and 1 percent of the remaining value, with a cap of $6,000; an upfront 2 percent mortgage insurance premium fee on the maximum loan amount, plus an annual fee that’s equal to 0.5 percent of the outstanding loan balance; along with an appraisal fee, closing costs and other miscellaneous expenses. Most fees can be deducted from the loan to reduce your out-of-pocket cost. To receive your money, you can opt for a lump sum, a line of credit, regular monthly checks or a combination of these.
To learn more, read the National Council on Aging’s online booklet “Use Your Home to Stay at Home” at NCOA.org/home-equity. And see the National Reverse Mortgage Lenders Association self-evaluation checklist at ReverseMortgage.org/consumerguides.
Also note that because reverse mortgages are complex loans, all borrowers are required to get face-to-face or telephone counseling through a HUD-approved independent counseling agency before taking one out. Most agencies typically charge around $125. To locate one near you, visit Go.usa.gov/v2H, or call 800-569-4287.
Jim Miller is a contributor to NBC-TV’s “Today” program and author of “The Savvy Senior.” Send your questions to Savvy Senior, P.O. Box 5443, Norman, OK 73070; or visit savvysenior.org.