By Jim Miller
‘Because reverse mortgages are complex loans, all borrowers are required to get counseling through a HUD-approved independent counseling agency before taking one out.’
Massive job losses, a volatile stock market and low interest rates caused by the coronavirus pandemic have caused many cash-strapped retirees to consider a reverse mortgage. But there’s a lot to consider to be sure it’s a good option for you now.
Let’s start with the basics.
A reverse mortgage is a unique type of loan that allows older homeowners to borrow money against the equity in their house (or condo) that doesn’t have to be repaid until the homeowner dies, sells the house or moves out for at least 12 months. At that point, you or your heirs will have to pay back the loan plus accrued interest and fees, but you will never owe more than the value of your home.
It’s also important to understand that with a reverse mortgage, you, not the bank, own the house, so you’re still required to pay your property taxes and homeowners insurance. Not paying them can result in foreclosure.
To be eligible, you must be 62 years of age or older, own your own home (or owe only a small balance) and currently be living there.
You will also need to undergo a financial assessment to determine whether you can afford to continue paying your property taxes and insurance. Depending on your financial situation, you may be required to put part of your loan into an escrow account to pay future bills. If the financial assessment finds that you cannot pay your insurance and taxes and have enough cash left to live on, you’ll be denied.
Around 95% of all reverse mortgages offered are Home Equity Conversion Mortgages (HECM), which are Federal Housing Administration-insured and offered through private mortgage lenders and banks. HECM’s also have home value limits that vary by county but cannot exceed $765,600.
How much you can actually get through a reverse mortgage depends on your age (the older you are the more you can get), your home’s value and the prevailing interest rates. Generally, most people can borrow somewhere between 50% and 60% of the home’s value. To estimate how much you can borrow, use the reverse mortgage calculator at ReverseMortgage.org.
To receive your money, you can opt for a lump sum, a line of credit, regular monthly checks or a combination of these.
But be aware the reverse mortgages aren’t cheap. HECM loans require a 2% upfront mortgage insurance payment, plus an additional 0.5% annual charge, on top of origination costs and lenders’ fees. Any amount you borrow, including these fees and insurance, accrues interest, which means your debt grows over time.
To learn more, read the National Council on Aging’s online booklet “Use Your Home to Stay at Home” at NCOA.org/home-equity.
Also note that because reverse mortgages are complex loans, all borrowers are required to get counseling through a HUD-approved independent counseling agency before taking one out. Most agencies charge between $125 and $250. To locate one near you, visit Go.usa.gov/v2H, or call 800-569-4287.
If you have a short-term need for cash, there are other options you should look into. For example, many low-income seniors don’t realize they qualify for the earned income tax credit, a refundable tax break that can put cash in your pocket. You also could use BenefitsCheckUp.org to search for financial assistant programs you may be eligible for.
Another possibility is a regular home equity loan or line of credit. This type of borrowing requires you to make payments, and lenders can freeze or lower limits on lines of credit, but the borrowing costs are much lower.
Jim Miller is the author of Savvy Senior, a column that appears in 55 PLUS magazine (www.cny55.com) and In Good Health—CNY’s Healthcare Newspaper (www.cnyhealth.com).