Traditionally, getting a mortgage meant securing a loan against property which one will pay up over an agreed upon period until full payment is made. Once paid in full, the property will officially belong to the borrower. The traditional mortgage could, however, be a bit limiting for those who are advanced in age. While it is possible to access one say at the age of 65 or 70, mortgages for over 65 years old come with far too burdensome financial commitments. On the other side of the equation is the reverse mortgage option which we are going to look at in detail in this article.
What is a reverse mortgage in simple terms?
A reverse mortgage is a home loan for senior citizens who have attained the age of 62 which is advanced as a mortgage facility against their homes.
This mortgage can be accessed by those who already own and live in their homes. The bank offers a loan with the house as collateral, which will earn interest on a monthly basis as long as you still live in the home. Upon death or moving out, your house pays back the loan up to 95 % of its current value. The loan can be paid out in lump sum, as a credit line, or as an annuity. This makes reverse mortgage a viable retirement funding option.
To qualify for a reverse mortgage, the owner of the home agrees to pay the property taxes and insurance premiums attached to the house and maintain it in good condition failure to which the mortgage lender serves the right to foreclose. Note that reverse mortgage rates vary from lender to lender, therefore, it is important to do your due diligence before settling on a specific one.
The difference between reverse and regular mortgage
- As we have already seen, a regular mortgage is a loan facility that a lending institution gives with the aim of purchasing a house. A reverse mortgage, on the other hand, is a loan facility in terms of cash, that a homeowner who is 62 years and above can access with their home as the collateral.
- While a regular mortgage lets the beneficiary make monthly payments with the aim of clearing the debt and owning the house, a reverse mortgage allows beneficiaries to access a loan against their already owned homes which accrue interest monthly until the owner passes away, moves out, or sells the house.
- Reverse mortgaged attracts insurance premium cost. While the regular mortgage could attract the same cost, this does not apply if you make a downpayment of 20 % or more of the purchase price of the property.
Reverse mortgage example
Assuming your house has been appraised at $ 400,000.
If, say, you had an existing regular mortgage balance of $ 50,000 your house will be valued at ($ 400,000 – $ 50,000) = $ 350,000
Calculating the reverse mortgage fees
1. The origination fee
This is usually fixed as per federal government regulation at 2 % of the first $ 200,000 and 1 % of any amount above $ 200,000
In this case, if you have opted to take a $ 300,000 reverse mortgage, your origination fee will be as below.
2 % * $ 200,000 = $ 4000
1 % * ($ 300,000 – $ 200,000) = $ 1000
Total origination fees = $ 5000
2. Initial mortgage insurance premium
This is usually set at a fixed amount of 2 % of the property value and is payable to the Federal Housing Administration (FHA) to cover the cushioning they give borrowers.
In this case, the appraised value of your property was $ 350,000
2 % * $ 350,000 = $ 7,000
3. Other Cost
Other costs include third-party closing costs including credit report fees, document preparation fees, survey costs, escrow fee, flood certification fee, and others will apply in this category.
This can be estimated at $ 1,500 – $ 2,000
Total Reverse mortgage fees
$ 5000 (1) + $ 7,000 (2) + $ 2,000 (3) = $ 14,000
This is an upfront fee that can either be paid out of pocket or included in the loan balance which means that even before receiving your first payment, your reverse mortgage will have accrued $ 14,000.
After your reverse mortgage has been processed, it will continue to incur between 30 % and 35 % in interests on a monthly basis based on your life expectancy. It is important to note that this interest also earns interest (compounding) as it is not paid monthly.
To determine the amount of mortgage you can access and the fees payable, most financial institutions will have a reverse mortgage calculator which can help you work out your numbers before seeking help.
Benefits of a reverse mortgage
- A reverse mortgage is an option for seniors to access retirement income for a better life while living in their homes during retirement without the pressure of repaying the loan facility.
- A reverse mortgage is flexible in that it can be accessed as a lump sum to address an immediate financial need, as an annuity, as a credit line, or a combination of two options.
- There is no limitation as to how one should spend their reverse mortgage.
- You can choose to invest your reverse mortgage or engage in business to increase your sources of income.
- A reverse mortgage is not taxed as it is not a source of income but a loan.
- A reverse mortgage does not interfere with your Medicare or Social Security program.
- A reverse mortgage is a low-risk mortgage for elderly people since it technically does not attract the penalties of defaulting as in the normal loan facilities. This is because payment begins after death or relocation of the homeowner.
- Mortgage lenders have no right to interfere with a beneficiary’s income or assets apart from the house attached to the mortgage facility.
- In the event of depreciation in value of your home, repayment is always attached to the current value of your home. This way, one will never be at loss owing more than the value of their house even if the reverse mortgage was attached to a higher value of the house.
- The reverse elderly mortgage is insured by the federal government under the Home Equity Conversion Mortgage Program giving the beneficiary a guarantee of remission of payments even if the lender will default in making the payments.
- A reverse mortgage is one of the very few loans for citizens with bad credit since its qualification is not based on one’s credit score.
Disadvantages of reverse mortgage
While a reverse mortgage comes with substantial benefits, it does not lack some drawbacks. These include:
- Defaulting in property tax and premium payments attached to the house which may result in foreclosure and the beneficiary losing their reverse mortgage. Sadly, this is a common scenario.
- The fees attached to reverse mortgage including the cost of insurance, accumulated interest, and the origination fee have often been considered as unnecessarily over the top. Perhaps a safer landing for a beneficiary can be to settle these fees with their reverse mortgage payments rather than from their pockets. Still, this does not discount the fact that they are exorbitant.
- The interest accrued by a reverse mortgage is compounded. For this reason, it increases on a monthly basis so that upon maturity, very high interest will be paid against the reverse mortgage.
- This reverse mortgage loan for senior citizens ties them to living in their home until death. In case they decide to move out, they will have to plan for repayment or face foreclosure.
- The HECM has set a limit of the amount that can be accessed as a reverse mortgage at $ 726,525 even if your house is of a higher value. This can be tricky if you need an amount higher than what has been stated by HECM.
Do you qualify for a reverse mortgage?
To be eligible for a reverse mortgage:
- You need to have attained 62 years of age
- You need to own or have substantial equity, usually higher than 50%, in your home and be living in it as your primary residence
- Your home should not be tied to another loan or mortgage facility unless you have a small balance due on the existing regular mortgage.
- You must be taken through consumer counseling to know what you are getting into.
- You need to have cleared other outstanding debts with the Federal government, for instance, federal student loan.
Is reverse mortgage a good idea?
This will entirely depend on why you intend to get the mortgage in the first place. If the reverse mortgage will help you
- Earn some extra income to keep you sufficiently comfortable during retirement.
- Expand your net worth by using it as a tool in your financial strategy and be of help to dependants
- Put off the utilization of other sources of income to maximize returns
- Address an emergency, for instance, a medical emergency
However, you need to
- Have made up your mind that you will settle permanently in your home
- Be in a position to meet the monthly tax, insurance, and other obligations tied to reverse mortgage.
- Completely understand what reverse mortgage entails
If after meeting with your elderly mortgage assistance counselor or a HUD counselor you are clear sure that this is the right option for you, you are making a personal decision and not out of peer pressure, then you are good to go. Otherwise, there is no harm in further consultation from experts.
Types of reverse mortgages
There are three main types of reverse mortgages
Single-purpose reverse mortgage
This reverse mortgage is offered by state, local, and non-profit organizations towards a specific agreed upon course. This can be home repairs, payment of property tax. It will take up a very small part of the homeowner’s equity and this is the reason why its processing is relatively simple and less expensive. Payment is done when the borrower moves to another primary residence, transfers ownership, or upon death. It is important to note that in the event that the borrower defaults in payment of insurance premiums for the property, he/she is expected to start remitting payment.
Home Equity Conversion Mortgage (HECM)
This happens to be the standard and most popular government home loans for senior citizens. It can be accessed when one attains the age of 62 and is a guaranteed loan facility thanks to the fact that it is insured by the federal government. Secondly, money advanced is not restricted to a specific purpose. The borrower can use it for any purpose. The amount to be advanced depends on the appraised value of the property, borrowers life expectancy, and the ability to pay the costs associated with the mortgage. This mortgage can be paid out as a lump sum, an annuity, or a line of credit. However, it is a costly option in terms of the upfront fees payable.
Proprietary Reverse Mortgage
Since the standard reverse mortgage comes with $ 726,525 limit set by the Federal Housing Administration (FHA), people whose properties have a higher value sometimes prefer to seek alternative options. The proprietary reverse mortgage is a mortgage for elderly parents who need to fetch much more from their home than the federal government is offering.
Also known as the jumbo reverse mortgage, this facility is advanced by private lending institutions but not insured by the federal government and so lacks insurance premium cost. This mortgage can only be disbursed as a lump sum amount. It is a more costly option as it attracts a higher interest but with a remarkably lower origination fee.
Home Equity Conversion Mortgage (HECM) for purchase
The HECM for purchase is among the senior citizens’ mortgage loans available for individuals who wish to purchase a home that fits their age requirements. The purchase process and the reverse mortgage issue take place in the same transaction. This is a helpful emotion if, for instance, a senior wants to move and live closer to family, downsize, or get a facility built to accommodate seniors. This option comes with fewer costs compared to other processes in which one purchases a home then secures a reverse mortgage in two separate transactions.
Mortgage assistance programs for seniors
Despite trying their level best, sometimes seniors find themselves falling behind in property tax, premium, and other payment schedules. This places them at the risk of foreclosure or other related penalties. Secondly, the cost of repair and maintenance can be unmanageable and mortgage repayment next to impossible to those that acquired the traditional mortgages to own their current homes. If you find yourself spending more than 30 % of your gross income on housing, it’s a cinch you are burdened financially.
Luckily, you could qualify for an elderly mortgage assistance program in your area. Below, we have listed some senior citizen mortgage assistance programs that can help them ease off the cost burden to live an improved life.
Owner-Occupied Repair Assistance Program
This program is run mostly by the state, city, or county government or not for profit organizations. It is targeted at elderly homeowners on a low income, to help them with accessibility-related renovations, dire repair needs, and cost-saving energy needs. This program may be available to other groups of people on a needs basis, for instance, the disabled or households with young children.
Loan Modification and Mediation Program
This program is available to those who have had challenges keeping up with mortgage repayment to a point of receiving a ‘Notice of Pre-Foreclosure Options’, ‘Notice of Trustee’s Sale’, or ‘Notice of Default’. Here, homeowners work together with a lawyer to renegotiate the terms of the mortgage with the aim of reducing it to an affordable repayment level.
Property Tax Exemption for Senior Citizens and Disabled Persons
This is more like a senior citizens mortgage discounts service which is available to homeowners who live in their homes as their primary residence. It is aimed at helping homeowners reduce their property tax payments as long as they stay in their homes. It targets individuals, 61 years and above with a disability, with an annual income of below $ 40,000.
This program is available to everyone including seniors and the amount to be deferred is determined by one’s disposable income. This program defers the tax payable to a later date when the home ceases to be your primary residence. However, it will attract interest in the process.
This senior citizens mortgage help program is an option for those who are faced with foreclosure and desire to do a short sale as a way around it. While they may be eligible for the modification program, it may not be the best solution for them given their situation.
This program targets low-income senior citizens with the aim of helping them reduce their energy costs. It includes repairs, crisis intervention, and other cost related to energy consumption in the home.
The Weatherization Assistance Programs aims at reducing energy costs by focusing on energy efficiency in a senior’s home. This is a state-run program that enables one to save as much as $ 450 annually.
Questions seniors frequently ask about mortgages
1. Am I too old to get a reverse mortgage?
A reverse mortgage for seniors is for anyone above the age of 62.
2. What should I do if I have a reverse mortgage and I am unable to pay property taxes and insurance?
Falling into arrears may lead you into default and cause your mortgage to be due, after which you risk foreclosure. If you feel you can no longer afford to make payments, talk to a foreclosure prevention counselor to weigh the available resolution options based on your situation.
3. Are my family, spouse, or dependants allowed to live in my house if I have a reverse mortgage?
Yes as long as the house remains to be your primary residence.
4. Are there alternatives to a reverse mortgage?
Yes. Options include
- Refinancing your current mortgage
- Selling and downsizing your home
- Selling to a family member or making an inter-family mortgage arrangement to be receiving payment regularly as agreed
- Rent a part of it to holidaymakers or to a tenant
- Live on social security
- Consider assistance programs available in your area
5. Can I get out of a reverse mortgage?
Yes, in two ways. Pay off the reverse mortgage with a lump sum amount if in a position to or sell off your home and use the proceeds to pay the reverse mortgage.
6. What happens to my house, if it had a reverse mortgage when I die?
Your heirs have the responsibility of paying off the loan. In case they are unable to, they can put the house up for sale and use the proceeds to pay off the mortgage or give the property back to the mortgage lender and have no further responsibility on it.
A reverse mortgage is a worthwhile retirement planning tool for seniors. However, being the lucrative business that it is, there are many unscrupulous parties and salespeople out there including friends, family, and relatives with a vested interest. This is made worse by the fact that seniors at this stage are vulnerable and in need of all-around support.
For this reason, it is important to take all the time one can to understand the concept of a reverse mortgage as well as those that one will be dealing with. Do not get involved if you are skeptical. Secondly, there is no harm whatsoever in seeking second and third opinions if this will help make a sober decision.