While there were many ups and downs in 2020, reverse mortgage loans saw an increase of 15.1% over the previous year.1 While reverse mortgages can be beneficial for senior homeowners, there are a few cases where it may not be a good fit.
What is a Reverse Mortgage?
A Home Equity Conversion Mortgage, (HECM), commonly known as a reverse mortgage loan, is a Federal Housing Administration (FHA) insured loan2 which allows homeowners, who are at least 62 years old, turn a portion of their home’s equity into funds without having to make monthly mortgage payments.3
Proprietary reverse mortgage loans, commonly referred to as Jumbo reverse mortgages, are designed for homeowners whose homes are in the higher value range, exceeding the a traditional HECM loan amount of $822,375. Because Jumbo reverse mortgages are not FHA-insured, lenders are not required to follow FHA guidelines which allows homeowners to access up to $4 million in equity (varies by lender).
Program Requirements
The FHA has provided guidelines for HECM’s as to who can qualify for a loan. You must be at least 62 years or older, your home must be your primary residence, you need to continue to pay the required property taxes and homeowner’s insurance and maintaining the home according to FHA requirements.
If you still have a mortgage on your home, it must be paid off using the proceeds from your reverse mortgage loan. Borrowers also must attend a counseling session with a Housing and Urban Development (HUD) approved counselor to help determine if a reverse mortgage is right for them.
Financing Costs
As with any other loan, a reverse mortgage has closing fees and interest charges that can vary. However, many of these up-front costs can be financed into the loan. You may want to consider how long you will be living in your current home before deciding to get a reverse mortgage. If you are planning on moving in a year or two, the closing costs of a standard reverse mortgage may prove to not be worth getting the loan.
Reverse Mortgage Interest
Like a conventional mortgage, reverse mortgage interest is charged on the amount of money borrowed. Unlike a conventional mortgage, a reverse mortgage does not require monthly mortgage payments on the principal or interest.3 Instead, the interest charges are added to the loan balance on a monthly or yearly basis depending on the type of interest rate the borrower chooses (fixed vs. adjustable). The loan balance plus interest will become due and payable when the home is sold, the last borrower no longer occupies the property as his/her principal residence, or there is a default on property taxes or insurance.
Are you are interested in learning more about a reverse mortgage loan? Call (800) 976-6211 to speak with a licensed loan advisor.
Disclosures
1 https://www.rminsight.net/reverseiq-newsletter/2021/01/goodbye-2020-hecm-lenders-december-2020/
2 As required by the Federal Housing Administration (FHA), you will be charged an up-front mortgage insurance premium (MIP) at closing and, over the life of the loan, you will be charged an annual MIP based on the loan balance.
3 Your current mortgage, if any, must be paid off using the proceeds from your HECM loan. You must still live in the home as your primary residence, continue to pay required property taxes, homeowners insurance, and maintain the home according to FHA requirements. Failure to meet these requirements can trigger a loan default that may result in foreclosure.