What Is A Reverse Mortgage?
A growing number of seniors these days are asking themselves: "What is a Reverse Mortgage?" Basically, a reverse mortgage is a type of mortgage that allows you to access a portion of the equity in your home to obtain tax-free cash without having to make monthly loan payments.
Why Should I Trust a Reverse Mortgage?
The reverse mortgage is safe and is insured by the Federal Housing Administration (FHA), a division of the Department of Housing and Urban Development (HUD). The reverse mortgage was signed into law as a national program in 1988 and since its inception has helped thousands of homeowners safely access the equity in their homes, helping them better enjoy their retirement years.
Who Created It and Why?
A more technical name for the government insured reverse mortgage is Home Equity Conversion Mortgage (HECM). Legislation authorizing the creation of the HECM was passed on December 22, 1987 (S.825) after more than a decade of study and lobbying by the National Council of the Aging, the VA Division of Housing, and other groups. President Ronald Reagan signed the bill into law on February 5, 1988. Over time the program for reverse mortgages in California and other states has undergone numerous changes in response to the changing market and to concerns of borrowers and advocacy groups.
Are There Reverse Mortgages That are Not Government Insured?
From time to time there have been privately sponsored reverse mortgages, but those have almost entirely disappeared, though there remains a market for jumbo reverse mortgages, serving a higher-end home market that cannot qualify for a HECM.
How Much Money Can I Get?
The amount of available proceeds you can qualify for under the HECM program depends on your age, appraised home value, and current interest rates. The older you are, and the more valuable your home (and the less you owe on your home), the more funds you qualify for.
Is There a Maximum Loan Amount?
The maximum loan limit is $625,500. This means that if your home is worth more than $625,500, the amount of equity you are eligible to receive will be based on $625,500. If your home is worth less, then the loan amount will be based on the lower appraised home value.
Is There Mortgage Insurance?
Many of the upfront fees associated with the HECM are capped by FHA. Currently, you pay an up front mortgage insurance premium (MIP) equal to 2 percent of the maximum claim amount (the value of the home or $625,500, whichever is less), plus an annual mortgage insurance premium (MIP) thereafter equal to 1.25% of the loan balance. The MIP is paid directly to FHA in exchange for guaranteeing the loan.
Why is the Mortgage Insurance There?
The MIP guarantees that if the lender servicing your loan goes out of business, the government will step in and make sure you have continued access to your loan funds. Furthermore, the MIP guarantees that you will never owe more than the value of your home when the home is ready to be sold and the HECM repaid.
Is There an Origination Fee?
Another major part of the cost of a reverse mortgage is the origination fee. On a line of credit or monthly income type of reverse mortgage, this equals 2% on the initial $200,000 of maximum claim amount (lesser of the home value or lending limit) and 1% on the balance thereafter with a cap of $6,000. On a fixed rate, lump sum type of reverse mortgage, the origination fee may be calculated differently, but still with a cap of $6000.
What Other Closing Cost Might There Be?
In addition to these primary fees, you will also pay other standard closing costs associated with getting a mortgage, including title insurance, appraisal, attorneys fees (depending on the part of the country you are in), recording taxes, etc.
Can I Get My Money All At Once?
There are three main ways to structure a reverse mortgage. You can get a lump sum at a fixed interest rate, you can get a line of credit at an adjustable rate, or you can get a monthly income at an adjustable rate. You can also get a combination of a line of credit and monthly income, still at an adjustable rate.
Is Reverse Mortgage Getting More or Less Popular?
The HECM has been steadily gaining in popularity for a number of reasons. A struggling economy means that that more seniors are looking to other alternatives for making ends meet. The FHA has increased the maximum loan limit to allow more families access, and guidelines on how the reverse mortgage can be presented and marketed have been tightened.
What Improvements Have Been Made to the Program?
For example, the regulations on what is supposed to be covered by the required 3rd party counseling have been strengthened, ensuring that borrowers are more clear about what they are getting into. Also, the unscrupulous pressure selling of annuities to seniors getting proceeds from the reverse mortgage, by the same people arranging the loan, has been eliminated. Press coverage of reverse mortgages has been increasingly positive, and surveys done by the American Association of Retired Persons (AARP) and others has shown that well over 90% of seniors with a reverse mortgage report a largely positive effect.