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What Are the Potential Benefits of A Reverse Mortgage?
First, the homeowner’s mortgage payment is eliminated. Second, homeowners may remain in their own home as long as they are physically able, can pay their property taxes and homeowners’ insurance, and maintain their home. Third, if they choose the reverse mortgage (RM) variable rate option, borrowers may establish a line of credit that grows at an interest rate of one-half percent higher than the mortgage interest rate, and they may also choose to receive a monthly payment for a fixed term of years or for life. Fourth, minimal income, poor credit, a recent bankruptcy or even an impending foreclosure will not disqualify an RM prospect. Fifth, repair needs identified by the FHA appraiser can be undertaken after settlement out of the loan proceeds. The satisfactory completion of the work is verified by an inspector designated by the lender. Sixth, prospective borrowers must receive RM counseling approved by the US Department of Housing and Urban Development (HUD) to assure they understand the essential elements of a reverse mortgage. Seventh, FHA guarantees that RM borrowers will have the opportunity to continue living in their home and benefit from its value growth and never have to pay back more than their home’s net sale value. Eighth, on a reverse mortgage, as a type of refinance, borrowers have the right to cancel their loan at no cost for three working days following the date of settlement for any reason.
What Are the Potential Dangers or Shortcomings of a Reverse Mortgage?
If borrowers do not follow a realistic family budget, they may exhaust all of their reverse mortgage resources and benefits beyond the elimination of their mortgage payment, so when emergencies arise, there is no nest egg, such as a line of credit balance, to draw upon. RM borrowers can exhaust their remaining assets by making early lump-sum distributions to their children, doing major optional improvements to their home, buying expensive autos, traveling frequently, and generally not economizing.
Exhausting RM assets is not a fault of the loan. HUD counselors advise RM borrowers not to initiate a reverse mortgage until it is really needed and then to spend wisely so that their assets remain in their line of credit for essential expenditures.
Are Reverse Mortgage Costs Really Too High?
There are three main RM costs: regular closing costs, Federal Housing Administration (FHA) insurance premiums and the origination fee. Closing costs for the appraisal, flood certification, title search, title insurance, escrow and settlement fees, notary, tax certification, courier, recording fees, etc., are about the same as on a regular refinance. The FHA insurance premium at settlement is 2 percent of the appraised value and one-half percent annually. This is essentially the same insurance structure used on regular FHA purchase and refinance loans. FHA guarantees monthly payments to borrowers for a fixed term or for the life of a borrower, guarantees that it will take over the loan if the lender goes out of business or if the RM loan amount reaches 98 percent of the FHA appraised value, and guarantees that the homeowners or their heirs will never have to pay back to their lender or FHA more than the sale value of their home less the sales commission. Usually, at sale, the home value exceeds the RM loan amount.
The origination fee on a reverse mortgage is limited by FHA to 2 percent of the appraised value or $6,000, whichever is less. (Conventional loans do not have origination fee limits.) The origination fee pays the lender for providing the mortgage, which, on an RM, can be a very time-consuming process over a period of many months.
Important Issues and Options to Consider Regarding a Reverse Mortgage
Since the older the borrower, the greater the amount of proceeds available, delay obtaining a reverse mortgage until you really need it – but do not add more mortgage debt in the meantime. Once you have a reverse mortgage, conserve the line of credit and let it grow. In addition, if you need a monthly payment from your line of credit, it will cost much less to do it for a limited, fixed term of years rather than for life.
Consider electing the line-of-credit program over the fixed-rate option in most situations, even if, as now, more proceeds can be received at settlement under the fixed-rate option. On the fixed-rate option, all proceeds must be taken out in a lump sum at settlement. Even if the initial fixed-rate proceeds are greater at the start of the loan than on an adjustable-rate option, the growth in the line of credit on the adjustable-rate option may overtake the proceeds of a fixed rate in not too many years.
Avoid allowing the perception of “high” closing costs to prevent your consideration of a reverse mortgage. Taking out a regular refinance mortgage or an equity line of credit instead can limit your options. Borrowers may find much later that when they have a need to eliminate their mortgage payments and generate more cash for home repairs, medical needs and other unexpected expenses, the total balances on an equity line or refinance mortgage may then preclude taking out a reverse mortgage.
Think long and hard about whether obtaining a reverse mortgage to generate funds for “anything you want,” as some RM advertisements try to persuade you, is wise financial planning for your future. If your income and savings don’t allow you to buy such luxuries as an expensive car, a major home renovation, extensive travel or even a boat, should you use a reverse mortgage to deplete your one remaining “safety net” asset for these purposes? If financial security for one’s future can only be obtained through a reverse mortgage, careful and sober thought and discipline are needed.
Be aware that an existing reverse mortgage can be refinanced into a new reverse mortgage in the future, but only if the home value has grown sufficiently and only within the first five years of the initial reverse mortgage. Conserving rather than spending all resources in a reverse mortgage must be cautiously and wisely considered.
Be aware also that the currently high reverse mortgage temporary loan limit of $625,500 expires Dec. 31, 2009. If you need a loan limit of higher than the regular $417,000 limit, plan to close by the end of this year or have confidence that these high loan limits will be extended.
For reverse mortgage counseling, contact one of this area’s HUD-approved housing agencies: Housing Counseling Services, 2410 17th St. NW, 202-667-7006; Lydia’s House, 3939 South Capitol St. SW, 202-373-1050; Marshall Heights Community Development Organization, 3939 Benning Road NE, 202-396-1200; or University Legal Services, 220 I St. NE, 202-547-4747 and at 3220 Pennsylvania Ave. SE #4, 202-581-0600. Counseling by telephone is available from Money Management International at 1-877-908-2227.
HUD now allows HUD-approved housing counseling agencies to charge a fee of up to $125 for such counseling. Most agencies don’t charge, so ask ahead about fees. |
