Ahhh, the joy of making that 360th mortgage loan payment! For 30 years you have worked for your home by paying a good chunk of your salary every month to a mortgage lender. With that major debt out of the way, you can now seriously consider retirement.
If you do decide to retire, you can take comfort in knowing that you can borrow money against your home without ever having to make another monthly mortgage payment. How, you ask? Through a reverse mortgage.
Like a home equity loan, a reverse mortgage enables seniors to tap into equity they have in their homes to meet individual financial needs ranging from paying off an unexpectedly large hospital bill to supplementing monthly income to taking a trip.
What makes a reverse mortgage different is that the borrower does not make monthly payments on the borrowed money. In fact, the borrower does not make one single loan payment while he or she lives in the home.
Because there are no required loan payments, a homeowner does not even need a job or any type of stable income to get a reverse mortgage.
A reverse mortgage comes due only when the title on the property changes, usually through sale or inheritance. In the event of inheritance, heirs can either sell the property and repay the loan out of the proceeds, or pay the loan off themselves so they can keep the home in the family.
If you are a retired homeowner, a reverse mortgage could be a financial lifesaver in times of need. The federal Department of Housing and Urban Development has realized this and has been encouraging lenders to offer such loans to the public.
The Federal Housing Administration (a branch of HUD) has been offering insurance on qualified Home Equity Conversion Mortgage (HECM) loans, helping to offset any potential losses that could occur to lenders.
Fannie Mae also has encouraged lenders to offer reverse mortgages through its Home Keeper program. Fannie Mae is a shareholder owned corporation that buys mortgage loans from lenders, so lenders can use the money to make more home loans to the public.
Fannie Mae spokesperson Kate Frailin said: “The Home Keeper Mortgage started in 1995. It was the first conventional reverse mortgage. If you are 62 or over and own your home free-and-clear, or have a very low outstanding mortgage balance, you can take out a loan based on the equity of your house and receive the proceeds on a payment option you choose.”
The proceeds can be paid in:
– Equal monthly payments for a fixed period of time that you select;
– Equal monthly payments for as long as you occupy the home as your principal residence;
– A line of credit that you can draw on whenever you want to;
– A line of credit plus equal monthly payments for a fixed period you select.
The maximum amount that can be borrowed is based on the age of the youngest borrower on the title, the current interest rate and the market value of the home.
Borrowers in their mid-70s with a paid-for home valued at $150,000 could reasonably expect about $50,000. Younger borrowers could expect less, older ones more. Each lender has different rules, so it pays to shop.
Janice Newsom, assistant vice president and product manager at Household Senior Services, says the program is helpful for some people:
“Only one payment is due, when they sell the home or when ownership is transferred. They are basically spending their own inheritance, or passing it out to their children or grandchildren instead of waiting until they are gone.
“It’s quick and easy,” Newsom adds. “We have a simple one-page application. From application to money in hand is about 30 days.”
To obtain an HECM, all the borrowers must be at least 62 years old. Because reverse mortgage loans erode the equity (and potential inheritance to relatives) homeowners wishing to get an HECM must receive counseling from a HUD-approved counseling agency.
Family members are also strongly encouraged to attend these sessions. Both HUD and Fannie Mae work closely with the American Association of Retired People (AARP) in training the people who run the counseling sessions.
Mitchell Friedman of Transamerica Home First says the average borrower using his firm is a single woman in her 70s. He says one of the biggest advantages of a reverse mortgage is that “the borrower continues to live in and own the home. At no point does the reverse mortgage lender get the property. The borrower maintains titles, taxes, insurance, all the privileges and responsibilities of home ownership.”
Friedman adds that a reverse mortgage may not be appropriate for everyone.
“It works for many seniors who may not have heirs or who simply wish to take advantage of the equity of their homes. A reverse mortgage is not always appropriate. If you know you are going to move in a few years, or if you wish to pass on most, if not all, of your equity to your heirs, it’s probably not appropriate for you.”
There are fees associated with an HECM or any reverse mortgage. They include an origination fee or other closing costs, a mortgage insurance premium and a servicing fee. You may be able to finance these items, however, as part of your loan balance so that you don’t have to pay for them in cash.
You can find out more about HECMs and other types of reverse mortgages by writing to: Home Made Money, AARP Home Equity Conversion Service, 601 E Street, N.W., Washington, DC 20049, or speaking with a local HUD-approved lender.
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Jim DeBoth is president of Mortgage Market Information Services. Address your questions to Mortgages, c/o the Chicago Tribune, Real Estate Section, 435 N. Michigan Ave., Chicago, Ill., 60611. Sorry, we cannot accept questions over the phone and will not give personal replies.
