The reverse mortgage is perhaps the most misunderstood home loan of them all. In the past, reverse mortgages have carried an unfortunate stigma associated with the fleecing of senior citizens. However, reverse mortgages do have a legitimate role in American banking. When used properly, they can actually improve one’s financial position and quality of life.
Most reverse mortgages are underwritten to the standards set forth by the Department of Housing and Urban Development. This is because the Fair Housing Administration (FHA) can then insure the loan. As such, most reverse mortgages payments will include an FHA mortgage insurance premium, just like any FHA loan. This also means that the FHA requires that all borrowers be treated with equality and fairness.
Why Get a Reverse Mortgage?
- Relief from Monthly Payments – Instead of paying monthly, borrowers receive a monthly or lump-sum check. This is basically the reverse of a traditional mortgage. The FHA calls this type of loan a Home Equity Conversion Mortgage (HECM). A HECM can also be structured with a line-of-credit option. Traditionally, borrowers make a payment each month as their home equity slowly increases. With a HECM, home equity decreases over time while the borrower receives cash. (This is called negative amortization.) Hybrid and line-of-credit loans also exist as reverse products for borrowers who may want to increase or decrease their cash payouts as needed. A borrower can even use a reverse mortgage to pay-off a traditional mortgage if one is still attached to the home.
- Extra Cash for Expenses – Retirement planning is speculative and sometimes the markets favor growth over income. In other words, a retiree may have less passive income than they expected and find it hard to pay their bills. A HECM or other reverse mortgage product can provide cash to pay for things that can’t be avoided - things like utilities, property taxes, and medical expenses.
Will My House Get Taken From Me?
In a word, no. Because…
- Borrowers can stay in the home for the duration of their life (if they want). According to FHA regulations, borrowers may retain ownership of their home even if they outlive their reverse mortgage.
- Mortgage insurance is part of the deal. Each monthly payout to the borrower accounts for a mortgage insurance premium payment to FHA, also known as an MIP. This provides a safety net that could come into play if borrower(s) want to sell the home but owe more than current market value.
- Heirs will not get stuck with a huge loan. This is another scenario where mortgage insurance could come into play. If the borrower or borrowers pass away, heirs can sell the home for as low as 95% of the appraised value and the FHA mortgage insurance will reimburse the lender for the difference, alleviating any loan balance that the heirs might have inherited. Of course, if the home is worth more than the loan balance, the heirs could sell the home to pay-off the loan balance and keep the profit.
- The homeowner/borrower is still in charge of the house. Industry regulations do stipulate that borrowers must keep their homes in good repair, have a homeowner’s insurance policy in place, and pay their taxes on time – basically the same standards that society imposes on every homeowner. But décor choices, house guests, pets, etc. are still the owner’s business. A reverse mortgage will not result in the lender choosing your paint colors or telling you who can stay at your house.
Each borrower, home, and loan are unique. It is important to work with an experienced loan officer who will give time and attention to your overall financial plan. Also, know that reverse mortgages do have maximum loan limits and borrowers must be at least 62 years old to qualify. The Ruoff team is experienced with HECM products and other reverse mortgage loans. Start online at www.ruoff.com/loan-options/purchase/reverse-mortgage to find a knowledgeable loan officer in your area. A reverse mortgage, when timed and underwritten properly, can free up cash flow and provide peace of mind for senior borrowers.