Question: My parents live in the same home I grew up in. Their income is shrinking but they don’t want to sell their home. Can you explain reverse mortgages?
Answer: I checked with Ken Tremblay, Colorado State University professor in Design and Merchandising, who says, "A reverse mortgage allows people to remain in their home as long as they live." However, the costs for obtaining a reverse mortgage are not low and it is probably best to consult with an attorney and family members before finalizing this choice.
With a reverse mortgage, lenders send homeowners a lump sum, monthly payments or occasional payments drawn on a line of credit based on the value of the home. Homeowners will not have to pay off a reverse mortgage loan until they die or sell their homes. At that time, they will pay off the loan plus interest. If the remaining home equity exceeds the total amount of the loan, the homeowners or their heirs receive the balance. The amount owed to the lender, however, will never cost more than the proceeds from the home.
Reverse mortgages are available from the U.S. Department of Housing and Urban Development, or HUD, and from private companies. Start your information search at the HUD Web site and then compare to products offered by private companies. The HUD Web site is http://www.hud.gov/progdesc/hecmdf.cfm. You also can reach them by telephone at 1-(800) 209-8085.
HUD offers a federally insured private mortgage called the Home Equity Conversion Mortgage, or HECM. To qualify, you must be 62 or older and have a paid-off or small-mortgage balance. There are no limitations based on assets or income.
The amount that a homeowner can borrow is calculated on a formula based on the age(s) of the owner(s), the current interest rate and the equity in the home. A HUD example shows that people 65 years old could borrow up to 26 percent of the home’s value, people 75 years old could borrow up to 39 percent, and people 85 years old could borrow up to 56 percent.
Before applying for the HECM Program, homeowners must receive free counseling from a HUD-approved reverse mortgage counseling office. You will find a list of these agencies at the HUD Web site or by calling 1-(888) 466-3487.
Several fees are charged up front and the amounts vary depending upon the lender. Fees may include an up-front premium of 2 percent of the home’s value plus appraisal and inspections fees. Charges may be wrapped into the loan. A maximum loan origination fee of $1,800 may be financed for HECM loans. HECM reverse mortgages also charge a monthly premium of .5 percent per year of the mortgage balance. These premiums cover the shortfall if the reverse mortgage plus costs exceeds the value of the home when it is sold.
You are eligible for an HECM loan if you live in a single-family residence, have a home in a one- to four-unit building, a manufactured home or mobile home, a unit in an FHA-approved condominium or a unit in a planned unit development. If repairs are needed to meet FHA standards, the costs can usually be included in the reverse mortgage.
I’ll talk more about reverse mortgages in my next column.
by Judy McKenna, Ph.D., CFP, Family Economics Specialist, Colorado State University, Cooperative Extension, firstname.lastname@example.org, 491-5772