Long-term solution: Reverse Mortgage
If you expect to live in your current home for several years, you could consider a reverse mortgage. Reverse mortgages are designed for homeowners age 62 and older. These types of loans are called “reverse” mortgages because the lender pays the homeowner. To qualify for this loan, you must live in the home as your main residence. Unlike conventional mortgages, there are no income requirements for these loans. You do not need to make any monthly payments for as long as you (or in the case of multiple homeowners, the last remaining borrower) continue to live in the home. When the last borrower moves out of the home or dies, the loan becomes due. There are several types of reverse mortgages available in the market. These include:
Home Equity Conversion Mortgage (HECM)-This program is offered by the Department of Housing and Urban Development (HUD) and is insured by the Federal Housing Administration. These are the most popular reverse mortgages, representing about95% of the market. There are two types of HECM reverse mortgages – the traditional HECM Standard loan, and the new HECM Saver loan. With a HECM Saver loan, borrowers pay lower up front costs, but do not receive as much money as they would with a HECM Standard loan.
Proprietary reverse mortgages-Some banks, credit unions, and other financial companies offer reverse mortgages designed for people with very high value homes. Depending on the type of loan, borrowers may be able to receive payments as a lump sum, line of credit, fixed monthly payment for a specific period or for as long as they live in their homes, or a combination of payment options. The money you receive from a reverse mortgage is tax-free, and can be used for any purpose. Reverse mortgages have unique features: All homeowners must first meet with a government approved reverse mortgage counselor before their loan application can be processed (HECM program). Older borrowers may receive more money, because lenders include life expectancy in calculating loan payments.
The national limit on the amount you can borrow under the HECM program may change from year to year. You can check the current national limit at www.HUD.gov. You now may use a HECM reverse mortgage to buy a home. This can make it easier for you to downsize to a house that better suits your needs, or to move closer to family caregivers. Loan closing costs for a reverse mortgage are the same as what you would pay for a traditional “forward” mortgage. These can include an origination fee, appraisal, and other closing costs (such as title search and insurance, surveys, inspections, recording fees). HECM borrowers also pay a mortgage insurance premium. Most of these upfront costs are regulated, and there are limits on the total fees that can be charged for a reverse mortgage. The origination fee for a HECM loan is capped at 2% of the value of the property up to the first $200,000 and 1% of the value greater than $200,000. There is an overall cap on HECM origination fees of $6,000 and a minimum fee of $2,500. You can finance these costs as part of the mortgage.
You (or your heirs) will never owe more than the value of the home if you sell the property to repay the loan, even if the value of your home declines. If your heirs choose to keep the home, they will need to pay off the full loan balance. You continue to own your house and can never be forced to leave, as long as you maintain the home and pay your property taxes and insurance. Depending on the type of loan, you may be able to get your loan funds through a combination of payment options (such as lump sum and line of credit).You can change the payment plan for a small fee. For HECM loans, the available balance on the line of credit may increase over time, depending upon interest rates. If there is in an existing mortgage on the property, the proceeds of the reverse mortgage are typically used to pay off the loan. This can increase the cash you have available each month, because you no longer have to make payments on your regular mortgage.
Closing costs for a reverse mortgage (origination fee, mortgage insurance premium, appraisal and other up front costs), and the servicing fee can vary a lot by the type of HECM loan, and by lender. Closing costs can be financed into the loan. You may use up a large part of your home equity over time and have less to leave as an inheritance to your family. If you are the only homeowner and you stay in an assisted living or nursing facility for more than a year, you will be required to repay the balance of the loan.
The loan amount can vary by thousands of dollars among different reverse mortgages. So it will be important for you to consider your options carefully when selecting a loan.
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