Senior Citizen's Guide digital books
Senior Citizen's Guide

Using Your Home as a Financial Resource

Homeowners who expect to live in their current home for several years should consider a reverse mortgage. Reverse mortgages are designed for homeowners age 62 and older. These types of loans are called "reverse" mortgages because the lender makes payments to the homeowner. To qualify for this loan, the home must be your main residence. Unlike conventional mortgages, there are no income requirements for these loans. Reverse mortgage borrowers do not need to make any monthly payments for as long as they (or in the case of spouses, the last remaining borrower) continue to live in the home. When the last borrower moves out of the home or dies, the loan becomes due. There are three types of reverse mortgages available in the market. These include:

Home Equity Conversion Mortgage (HECM)—This program is offered by the Department of Housing and Urban Development (HUD) and is insured by the FHA.

Fannie Mae Home Keeper loan—Borrowers can receive more cash from these loans than with a HECM since the loan limit for this product is higher.

Financial Freedom Cash Account loans—This product is available to seniors who own homes that are worth more than $600,000. These "jumbo" loans are especially helpful to homeowners with expensive homes since there is almost no maximum home value or loan limit under this plan.

Borrowers can select to receive payments as a lump sum, line of credit, fixed monthly payment (for up to life in the home), or a combination of payment options. The money borrowers receive from a reverse mortgage is tax-free, and can be used for any purpose.

All homeowners must first meet with a government approved reverse mortgage counselor before their loan application can be processed or they incur any costs. Lenders include life expectancy in calculating loan payments, so older borrowers are eligible to receive more money. There are limits on the amount you can borrow under the HECM program. These limits reflect local property values.

Most of the costs that reverse mortgage borrowers pay are similar to those of a traditional home loan or to refinance an existing mortgage. These include an origination fee and other closing costs (such as an appraisal, title search and insurance, surveys, inspections, recording fees, etc.). HECM borrowers also pay a mortgage insurance premium. Most of these upfront costs are regulated, and there are limits on the total fees that can be charged for a reverse mortgage. As with conventional mortgage loans, closing costs can be financed as part of the mortgage. Most people get a reverse mortgage through a mortgage lender. Some credit unions and banks, along with state and local housing agencies, may also offer these loans.

Advantages
• You (or your heirs) will never owe more than the value of the home at the time you sell the home or repay the loan, even if the value of your home declines.

• You continue to own your house and can never be forced to leave as long as you maintain the home, and make your property tax and hazard insurance payments.

• Borrowers can select to receive loan funds through a combination of payment options (such as lump sum and line of credit). You can change the payment plan for a small fee.

• For HECM and Cash Account loans, the available balance on the line of credit may increase over time, depending upon interest rates.

• In cases where there is in an existing mortgage on the property, the proceeds of the reverse mortgage are typically used to pay off the loan. This can increase a borrower's monthly cash flow since they no longer have to make payments on their conventional mortgage.

Disadvantages
• Closing costs can add up to more than 5% of the value of your home (for example, 5% of a $100,000 home would be $5,000). These costs can be financed into the loan.

• Borrowers may use up a large part of their home equity over time, reducing the amount they can leave as an inheritance to the family.

• If you are the only homeowner and you need to stay in an assisted living or nursing facility for more than a year, your loan will become due and will not be available to pay for care in these facilities.

Whatever you decide, don't wait until the last minute, talk with your family, and don't rush into any decisions without fully weighing the advantages and disadvantages of your individual situation!

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