Reverse Mortgages: What You Should Know
For homeowners 62 and above, a reverse mortgage enables them to convert a portion of the equity in their homes into tax-free income without selling the home, taking a new monthly mortgage payment, or giving up their title. The reverse mortgage is names such because the stream of payments is “reversed.” Instead of making monthly payments to the lender, the lender makes the payment to the homeowner.
There are three basic types of reverse mortgages:
- federally-insured reverse mortgages, which are also known as Home Equity Conversion Mortgages and are supported by the U.S. Department of Housing and Urban Development;
- single-purpose reverse mortgages, which are offered by various local and state government agencies and non-profit organizations; and
- proprietary reverse mortgages, which come in the form of private loans that are supported by the companies that create them.
Qualifying for a Reverse Mortgage
In order for a person to be eligible for a reverse mortgage through HUD, HUD’s Federal Housing Administration requires that the borrower owns a home, is 62 years old or older, and the home is owned outright, or the mortgage balance is low and can be paid off upon closing. The borrower must also live in the home. The borrower is also further required to receive consumer information from counseling services that are approved by HUD from sources prior to obtaining the loan.
There are only certain types of homes that are eligible for reverse mortgages. The home must be a dwelling for a single family or contain two to four units that are owned and occupied. Detached homes, townhouses, condominium units and some manufactured homes do qualify. Condominiums, however, must be FHA-approved. It is possible for the individual units to qualify under what is called the Spot Loan program.
Typical Costs Associated With Reverse Mortgages
Many of the costs that a borrower pays to acquire a home loan or refinance their existing mortgage, applies to reverse mortgages as well. The borrower can expect to be charged an up-front mortgage insurance premium, an origination fee, an appraisal fee, and other standard closing costs.
The origination fee is what covers the lender’s operating expenses such as marketing costs, office overhead, etc when making the reverse mortgage. Under the Home Equity Conversion Mortgage program, which accounts for 90% of all U.S. reverse mortgages, the origination fee is equal or the greater of $2,000 or 2% of the claim amount.
Mortgage Insurance Premium
Borrowers are assessed a mortgage insurance premium under the HECM program. This premium is equal to 2 percent of the maximum claim amount or the total home value, whichever is the less of the two. Plus, the annual premium after that is equal to 0.5% of the loan balance.
It is the appraiser who is responsible for assigning a market value to the home that is current. These appraisal fees usually range between $300 and $400.An appraiser must also ensure that there are no significant structural defects, such as a leaky roof, a bad foundation, or termite damage. The appraiser must look at these things and place a value on the home.
Other costs upon closing that are charged to the reverse mortgage borrower may include:
- The credit reporting fee is what verifies any federal tax liens or judgments that may have been handed down against the borrower. This fee generally costs less than $20.
- The flood certification fee is what determines whether or not the property is located on what is considered a federally-designated flood plane. This fee generally costs less than $20
- An escrow, closing or settlement fee generally includes various closing services such as title search, which depends on the homeowner’s particular area. The cost for this is usually between $150 and $450.
- The document preparation fee is charged in preparation of the final closing documents. These documents include the mortgage note and other items that are recorded. This usually costs between $75 and $150.
- The recording fee is charged because the mortgage lien must be recorded with the homeowner’s county recorder’s office. This can cost between $50 and $100.
- The courier fee covers the cost of documents that must be mailed overnight between the lender and the title company. This usually costs under $50
- Title insurance protects the lender against any loss resulting from disputes over ownership of the property. This fee varies by the size of the loan. However, the larger the loan amount, the higher the cost for insurance.
- The home must be inspected for infestation by wood-destroying organisms. This pest inspection usually costs under $100.
- The survey is what determines the ‘real’ boundaries of the property. Surveys are usually requested to ensure that any neighboring properties have not encroached on the borrower’s property. A survey usually costs under $250
Receiving Your Money
The amount of cash that can be obtained from a reverse mortgage is dependent upon the particular program the borrower selected.
- The amount can vary from one program to the next. The typical consumer might get $30,000 more from one program and not get much from the next. There isn’t a single program that works for everyone.
- The HECM usually provides the most cash to those with the most expensive homes.
- The amount of cash obtained from each program depends on how old the owners are, the value of the home, and what the current interest rates are. Basically, the most cash goes to those borrowers who are more advanced in age and living in homes of high value at a time when interest rates are not very high. On the other hand, the least amount of cash usually goes to the youngest borrowers living in homes of low value when interest rates are high.
There are several ways you can elect to receive your “payments”:
- One time lump sum
- Monthly payments
- Receive a credit line
- Use a combination of them all
Reverse Mortgages and Bank Home Equity Loans
The difference between a reverse mortgage and a home equity loan is that the homeowner must have sufficient income versus a good debt ratio when obtaining a home equity line of credit. The reverse mortgage, on the other hand, is different because it pays you and is available regardless of income amount. The amount borrowed does not depend on income, but depends on age, the appraised value of the home, and interest rates.