You've undoubtedly heard about the record number of people who have been refinancing their homes to take advantage of the lowest mortgage rates most have seen in their lifetimes. But what many don't know, is that today's low rates also offer a tremendous advantage to folks whose mortgages are either substantially or completely paid off.
If you are at least 62 years old and own your home, escalating real estate prices mean you're probably living in the biggest asset you have. What you may not realize is that there's a way to tap into the value of your home without having to take out a home equity loan. It's called a "reverse mortgage." It allows seniors who need extra cash -- either in the form of a lump sum or monthly payments -- to turn their homes into piggy banks.
"People have all this wealth sitting idly in their homes," says Peter Bell, president of the National Reverse Mortgage Lenders Association (NRMLA). "If they take out a home equity loan, they're going to have to make monthly payments. That can be hard for seniors who are living on fixed incomes. A reverse mortgage gives them the ability to take out the wealth now and use it for things they want or need and not worry about paying it back until they leave it or die."
Essentially, a reverse mortgage is a way to borrow against the value of your home without having to move out or take on additional debt payments. It's a way to give yourself extra income, pay off unexpected medical bills, come up with the cash to visit the grandkids more often, make repairs to your home -- in short, you can use the money for anything you want. It can provide the money a senior might need to remodel their home with wheelchair ramps and other modifications that will allow them to continue to live there independently.
But you do not have to own your home "free and clear" to take advantage of this -- that's a common misunderstanding. Bell says if you've got enough equity in your home, you can take out a reverse mortgage in order to pay off your existing mortgage and eliminate the monthly payments.
Because of some problems in the 1990s, a number of federal safeguards have been put into place to that ensure seniors get a fair deal. For instance, the fee to originate a reverse mortgage varies only slightly because the maximum you can be charged is 2-percent of the value of your home, up to the FHA mortgage limit in your area. There's no need to shop interest rates because they are the same nationwide.
You can get a list of reverse mortgage lenders who have agreed to adhere to NRMLA's Code of Conduct by logging on to its website: www.reversemortgage.org. You can also order a copy of the Reverse Mortgage Guide online or by calling 866-264-4466 (toll free).
Federal law requires that before signing anything, a person considering a reverse mortgage must receive mandatory counseling at no charge provided by an independent third party so that you understand the ramifications of what you're doing. Dave Carey, Reverse Mortgage Product Manager at Fannie Mae, says it's important for seniors to understand that while they are not making payments on the loan, interest is accruing and is being added to the principal. In other words, the outstanding loan value gets larger over time -- just the opposite of a regular mortgage.
It's also important to recognize how your estate will be affected. Since the reverse mortgage loan must be paid back when the home is sold, you move out or upon the death of the owner, the American College's Richard Delisse, an author and editor of textbooks for financial professionals, says this reduces the value that will pass to your heirs. However, you (or your heirs) will never be required to pay back more than what the property is worth.
You can only qualify for a reverse mortgage on a property that is your primary residence. Just as with a regular mortgage, you are responsible for maintaining the property in good condition, as well as for paying property taxes and homeowner's insurance.
So how much money can you actually pull out of your home with a reverse mortgage? It depends upon three factors: your age, the value of your home and current interest rates. The older you are, the more money you can borrow. Your shorter life expectancy means fewer years for the loan value to build up.
While you generally apply for a reverse mortgage through a local mortgage broker (some banks also offer them), they are generally all backed by one of two entities - Fannie Mae, a quasi-governmental buyer of mortgages, and the federal Housing and Urban Development Agency, or H.U.D. Reverse mortgages backed by both Fannie Mae and H.U.D. come with federal insurance that guarantees the payments. However, each uses different factors to determine how much they're willing to lend.
The National Reverse Mortgage Lender's homepage has a nifty calculator that will let you run a side-by-side comparison. All you have to do is fill in the homeowner's date of birth (you must be at least 62), value of the home, and zip code. In seconds it tells you how much of a reverse mortgage each lender will provide.
I took a hypothetical home worth $120,000 in a zip code near where I live, but varied the age of the applicant. In all cases, H.U.D.'s "Home Equity Conversion Mortgage" (HECM) provided a bigger loan, mainly because it's based on lower interest rate projections than the ones used in Fannie Mae's "Homekeeper" product. However, Fannie Mae has a higher loan limit than H.U.D., so folks who have higher home values could conceivably get more by going with Homekeeper.
Here's what my search came up with:
|Age of Applicant||You Could Get||HECM||Homekeeper|
|65||Single lump sum of:||$73,389||$17,839|
|Monthly loan advance as long as you live:||$395||$140|
|75||Single lump sum of:||$81,881||$42,530|
|Monthly loan advance as long as you live:||$503||$368|
|85||Single lump sum of:||$91,606||$63,713|
|Monthly loan advance as long as you live:||$748||$621|
There's lots of flexibility to arrange payments the way you wish. For instance, instead of monthly monthly payments for a long as you live, you could choose to receive them for a fixed period of years. Or use a combination of, say, 15 years or life, whichever is longer. If you don't want a lump sum or monthly payments, you can simply set up a line of credit that you can tap in varying amounts whenever you need money.
There's even a reverse mortgage for the wealthy, but house-poor: the "jumbo" reverse mortgage. This is for homes worth more than $400,000. Check out the "Financial Freedom Cash Account" if you fall into this category. NRMLA's Bell says he knows of a homeowner in Southern California who took out a reverse mortgage on an $18 million home!
You can find a wealth of information on the internet if you simply type "reverse mortgage" into your search engine. Also, be sure to visit specific sites mentioned above.
Regardless of what your home is worth, Bell points out that today's "combination of extremely low interest rates and highly appreciated home values means you can get more out of a reverse mortgage than ever before." Just keep in mind that the rates on reverse mortgages "float." This means that when mortgage rates go higher, so will the interest rate at which your loan is accruing. This has no impact on the income you're receiving, but it does mean that the amount which eventually has to be repaid will increase.However, as previously mentioned, this can never be more than what your home is worth because the total load is capped at the value of the property.
If you're a senior citizen who has equity built up in your home, there's no reason to do without. I'm sure your kids would be happier if you used some of that appreciation to make your life more comfortable.
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