3 Things You (Probably) Didn't Know About Reverse Mortgages
Reverse mortgages—technically known as Home Equity Conversion Mortgages (HECM)—are available to senior homeowners aged 62 and over, even married couples. The borrower will live mortgage-payment-free and always retain the title to the home.
There are many myths and misconceptions that surround reverse mortgages—but there are also some not-so-well-known perks to the loans. Here are my top three:
1. Most Reverse Mortgages are Insured by the Federal Housing Administration (FHA)
It is normal for older adults to be concerned with the welfare of their children after their passing. This is one of the reasons many seniors balk at the idea of a reverse mortgage—they don’t want to “saddle their children with their debt.”
Fortunately, there are safeguards in place to address this issue.
Almost all reverse mortgages are FHA insured. This means that, under current guidelines, the mortgage includes a large equity reserve that will always protect their home from going “upside down”. Even if the homeowner lives to be 110, uses up all the equity in the home, and the market crashes, the heir will never owe more than the home is worth. FHA and HUD have guaranteed that they will cover the bank’s losses should the situation arise. This leaves the homeowner and their estate protected against any possible losses.
It’s important to also know that, on the flip side, if the home is worth more than it sells for after the owner’s passing, the heirs will receive any excess equity available. The bank will never take more than what is needed to pay off the loan.
2. Reverse Mortgages Have the Option of a Growth Line of Credit
For many years, there were only two ways to tap into home equity when obtaining a reverse mortgage: either a lump sum payment or monthly installments. This has changed, and HUD has added two new options:
A Reverse Mortgage Line of Credit (HECM-LOC) is similar to a Home Equity Line of Credit (HELOC), with the exception that borrowers are not required to make repayments. The other option is a Reverse Mortgage for Purchase, which allows seniors to use a reverse mortgage to make a home purchase.
The Line of Credit is just as it sounds. It is a line of credit, with funds that are available for the homeowner to take when they need it. But the major benefit of this line of credit is that it also has a growth factor attached to it. This means that any money left in the line of credit will grow at a rate equal to the interest rate and mortgage insurance rates on the loan.
Here is an example: Imagine that your HECM-LOC has an annual interest rate of 4.5% and a mortgage insurance rate of .5%. The combined annual rate is 5.0%. Now let’s say you have $100,000 in this line of credit, which you don’t plan to use for 15 years unless you need it. That $100,000 is going to grow by 5% annually until you begin accessing those funds.
After year one, this line of credit is up to $105,000. After year five, it is up to $127,500. And after 15 years, the total funds in the line of credit are up to nearly $208,000. In 15 years, that 5% return has grown the available funds by 108%!
3. A Reverse Mortgage Can Be Used to Purchase a Home
Although the Reverse Mortgage for Purchase program has been around for years, it is still relatively unknown—even in the real estate community.
Reverse mortgages are an excellent option for retirees looking to buy a home near or far. These loans do require a down payment at the time of purchase, but, beyond that, there are quite a few differences between these and conventional mortgages.
Borrowers are often able to purchase outside their expected “cash purchase” price range, because the cash is used as a down payment and the remainder of the purchase amount is covered under the reverse mortgage loan, while the borrower lives mortgage-payment free.
The borrower will also always retain the title to the home, just as they would with a conventional mortgage. These loans are also FHA insured, so everything discussed above still applies in that regard. The borrower can own other properties and still qualify, as long as the home being purchased is their primary residence.
The Bottom Line
The bottom line is this: Reverse mortgages can provide a way for senior homeowners to live mortgage-payment free, retain the title to their home, and avoid saddling their heirs with debt. There are also ways to leverage reverse mortgages for adult children or other family members who want to keep the home in the family. And you can even use a reverse mortgage to purchase a single-family home, town home, or FHA-approved condo. Ask a qualified Reverse Mortgage Specialist for more information!
A version of this blog post was previously published at Janice Cohen: Los Angeles Reverse Mortgage Specialist.