Reverse mortgages can improve lifestyles

Reverse mortgages can improve lifestyles

Reverse mortgages can improve lifestyles of any seniors who are least 62 and wish to increase their incomes or provide a meaningful hedge against future contingencies. Bear in mind that the reverse mortgage options that are available to access a portion of the equity in your home include:

— Establishing a credit line that can be tapped to meet unexpected future contingencies, or even pay for a special event;

— Increasing your monthly income for as long as you live in your home;

— Withdrawing monies out of your equity values for a limited period of time. This option could provide additional income for a set period and concomitantly provide time for one’s untapped retirement assets to grow;

— Taking a cash draw to extinguish short term debt or pay off your current mortgage. This is the only option for which a fixed interest rate is permitted. All of the other choices entail an adjustable interest rate.

Combinations of the above are also possible, such as beginning with an equity line of credit and then converting that line to a monthly tenure payment.

The most interesting option and perhaps the most valuable is establishing a credit line, but this choice will require that the borrower exercise the discipline to forego impulsive withdrawals. The unused portion of this credit line will increase at an interest rate that is equal to the interest rate on the reverse mortgage, plus the FHA’s mortgage insurance premium rate of 1.25%.

Since the HECM program is insured by the FHA, the maximum home value that can be recognized is currently $631,000, regardless of what your home is actually worth. However, homeowners with more valuable residences can still profit from a reverse mortgage if their goal is to increase income. The downside for a valuable home is that the mortgage insurance premium will be based on the actual appraised value of the property, not just $631,000.

If a borrower changes his/her mind after a few years, the reverse mortgage balance could be repaid and the borrower would get any residual cash. Moreover, if the borrower expires while the loan is larger than the value of the house, the heirs have the option to purchase the home by paying 95% of the then appraised value of the property and do not have to repay the loan.

The upfront costs of a reverse mortgage include lender’s fees, upfront mortgage insurance premiums and real estate closing costs. The costs that are levied over the life of the loan are interest charges plus mortgage insurance premiums, along with loan servicing fees. As your loan balance increases, these ongoing costs are compounded over time and increase the amount of your debt.

These costs vary widely from lender to lender, so the most judicious approach is to determine why you need to access your home’s equity, and then select the withdrawal option that best meets that need. After you have completed that exercise, then you should shop for the best deal.

In my opinion, the best place to do your shopping is online at mortgageprofessorc.com.

Here are some examples from The Mortgage Professor’s website, using his mortgageprofessorc.com.. In each of these examples, the home is worth $450,000 with a zero mortgage balance and both spouses are 75 and live in Aiken:

Max monthly income for as long as you live in the house: $1,274

Maximum initial credit line: $129,400

Maximum credit line in 15 years: $466,671

In order order to qualify for a reverse mortgage, would-be borrowers must meet with an approved HECM counselor and complete the required training. The reasoning behind this requirement is sound: seniors are the most likely to apply for reverse mortgages, and the Feds rightly want to prevent abuses. The problem is that this counseling only ensures that the enumerated topics will be discussed, and that seniors who should not pursue a reverse mortgage do not. Sadly, the reverse is not true; many seniors who should consider a reverse mortgage will not since they have not first zeroed in the most advantageous withdrawal strategy to meet their needs. Unbelievably, the disclosure requirements from these counseling sessions can run to as many as 97 pages. That alone would turn me off.

A better counseling approach should address the withdrawal option that would best meet the senior’s needs and then disclose the costs therein. Reverse mortgages can improve lifestyles By GREG ROBERTS On the Money.