Another Look at Reverse Mortgages
Believe it or not, reverse mortgages had been around long before former Sen. Fred Thompson became a spokes person for American Advisors Group, one the largest players in the reverse mortgage industry. In fact, the first reverse mortgage was issued in 1961 to Nellie Young in Portland, Maine, by Nelson Haynes of Deering Savings & Loan. Haynes designed this first of its kind loan to allow the widowed wife of his high school football coach to stay in her home after losing her husband.
In 1987, Congress passed the Home Equity Conversion Mortgage Demonstration Bill which was a reverse mortgage pilot program that insured reverse mortgages. In the following year, President Reagan signed the reverse mortgage bill into law, which gave HUD the authority to insure reverse mortgages through the FHA. In 1989, the first Home Equity Conversion Mortgage insured by the FHA was issued.
Like a home equity loan, a reverse mortgage allows a homeowner to convert a portion of his/her home equity into cash that can be used for any purpose.
Unlike other home loans, however, homeowners usually make no interest or principal payments during the life of loan. The interest is added to the principal, which is why reverse mortgages are often called “rising debt” loans. Unless one elects a fixed-term loan, the loan only becomes due when one dies, sells the home to move or otherwise leaves the home for more than 12 months – for instance, if a health issue requires one to enter a nursing home.
In order to qualify for an FHA-insured reverse mortgage, one must:
• Be 62 years of age or older.
• Own the property outright or paid-down a considerable amount.
• Occupy the property as your principal residence.
• Not be delinquent on any federal debt.
• Possess the financial resources to continue to make timely payment of ongoing property charges such as property taxes, insurance and Homeowner Association fees, etc.
• Participate in, and pay $125, for a consumer information session given by a HUD- approved HECM counselor.
Additionally, there are property and personal financial requirements that must be met as well.
The essential question for persons considering such mortgages is: “Do you want to increase your wealth over time or increase your retirement income?” Answering “Yes” to the wealth question generally will mean that you should not consider a reverse mortgage, but a “Yes” answer to the income question could make you a candidate for such a loan.
There are a lot of moving parts with a reverse mortgage. If the loan is secured by the FHA, there will be an upfront mortgage insurance premium based on the amount one borrows in the first 12 months: 0.5 percent of the appraised value of the home if you borrow no more than 60% of the principal limit; 2.5% of you borrow more in the first year.
There is a loan origination fee charged by the lender. If your home is worth less than $400,000, the fee ranges from $2,500 to $6,000. For homes worth more, the maximum is $6,000. Naturally, there are closing costs, just as in a traditional mortgage, and here is where shopping will help, since there are no specific limits on such charges.
You may choose to use a portion of the loan proceeds to pay these upfront costs, but it is generally better to pay these charges out of pocket and avoid interest charges and ongoing mortgage insurance premiums on such expenses.
The payments from the reverse mortgage can be taken:
• For as long as at least one borrower is living in the residence.
• In equal monthly amounts for a fixed number of months.
• As a line of credit, with monies available until the balance is zero.
• As combinations of the above.
The amount of money that is available depends on one’s age and the value of the home. For a 75 year old in Aiken, with a home value of $450,000 and a zero mortgage balance, the maximum lump sum payment was $227,000 from one lender.
ON THE MONEY: By Greg Roberts Columnist. Brought to you as current and helpful Reverse Mortgage news by Scott Underwood “Alabama’s Reverse Mortgage Guy”.