Reverse Mortgages Are Not For Everyone, But They Are Great Products For Certain Individuals In Their Retirement Years With Limited Cash Flow
You have probably heard the term “reverse mortgage” but do you really understand what one is? A reverse mortgage is basically a loan homeowners older than 62 years old can utilize to convert part of their equity in their home into cash. Retirees with limited income streams were originally the target audience for this product – the idea was that folks in their retirement years could benefit from the equity in their homes by having the home/bank make payments back to the homeowner instead of the homeowner paying the bank. A borrower is not required to pay back the loan until the home is sold or otherwise vacated. As long as a borrower lives in the home they are not required to make any monthly payments towards the note balance, however the borrower must remain current on the property taxes, HOA dues, etc.
To obtain a reverse mortgage on a home, that home must be your primary residence, which means you must reside there at least 183 days per year. Additionally, once you obtain a reverse mortgage, you must confirm your residency by signing an Annual Occupancy Certificate that is provided to a borrower by the loan servicer. If you must leave your home for an extended period of time, due to work or health reasons, you are required to notify the servicer. If you are out of your home for more than 12 consecutive months your loan will be in default.
Importantly for borrowers, there is no restriction for how reverse mortgage proceeds can be utilized.
Types of Reverse Mortgages
A Home Equity Conversion Mortgage, or HECM, is a reverse mortgage insured by the Federal Housing Administration through U.S. Department of Housing and Urban Development. The maximum loan amount you may access during the first 12 months after closing escrow is sixty (60) percent of the full loan amount. If you have access to $200,000 you may only use $120,000 for the first 12 months. After 12 months is up you may access the entire amount plus an additional 10 percent.
HECM’s are not government loans thus the borrower pays an upfront fee and an annual fee for insurance of approximately 1.25% per year. The insurance protects the borrower if and when the lender is not able to make a payment, or if the value of the home upon sale is not enough to cover the loan balance. HECM’s make of the majority of reverse mortgages in the U.S. Importantly, HECM’s require the borrower receive third party counseling prior to loan execution and completion.
Proprietary Reverse Mortgages – PRMs
Although they exist there are currently very few PRMs. These type reverse mortgages are non-FHA insured reverse mortgages offered by banks and mortgage companies. PRMs are not subjected to the same rules and regulations that HECMs are and in some states no counseling is required for PRMs. Another name for PRMs is ‘Jumbo’ reverse mortgages because they are typically placed on higher value homes, such as $750,000 or more.
Counseling Is Required (Typically)
It is always recommended that seeking this type of lending vehicle be accompanied by competent advice. HECMs require counseling, but in addition to statutory counseling a borrower should seek competent counsel from others including friends, family, and even a real estate attorney familiar with these loans. The primary reason for counseling is that many circumstances may arise which do not seem likely at the time of origination, but may be lurking down the road like long-term care facility requirements, or other health related circumstances. A competent counselor will explain the reverse mortgage to a borrower. They will explain the costs, the product options, explain alternatives, explain consequences of default, and will provide other resources for the borrower to review. At the end of the counseling session the borrower and counselor will both an affidavit of counseling
Conclusion – Is A Reverse Mortgage Right For You?
Although reverse mortgage may present options for millions of retired Americans they are clearly not for everyone. Long-term health concerns, cost conscious borrowers, and other reasons will prevent some people from using this option. It is extremely important to seek competent advice and counsel if you are interested in pursuing a reverse mortgage. Please don’t hesitate to contact for me further information about reverse mortgages and confidential referrals for reverse mortgage professionals.