With the current Social Security crisis, many are concerned about how long their benefits will actually last. Add to that genuine concern about whether they have or not saved and invested enough for retirement and you can certainly understand the stress levels of 41 million people who are now 50 to 60 years old.
Television commercials across the country have brought the term ‘reverse mortgage’ into the lexicon of many Americans. But how exactly they work remains a mystery. Also questionable is how risky it is for seniors to register. This article is a short course on what they are and how they work:
- Where Do Reverse Mortgages Come From?
Federally insured ‘home equity convertible mortgages’ (also known as ‘reverse mortgages’) emerged in 1989. However, although many seniors with eligible home equity are entitled to use them, it is estimated that only about one percent of those who qualify have placed them into place. Most of the growth that has occurred in the home equity convertible mortgage market has occurred in just the last few years.
- How does it work?
First, to qualify you must be 62 years old. Second, the house you live in should be your ‘primary residence’ and the amount of equity you have in the home is key. Basically, the higher the appraisal value of your home and the older you are, and the lower the interest rate on your mortgage, the higher the amount you qualify for.
The amount you can receive is flexible. For example, you can get a lump-sum amount, or if you prefer, a line of credit to be tapped when you need it, or a monthly payment coming to you for a certain time (fixed term) or a combination of all of them. on.
There are no loan payments to make, so the threat of foreclosure is unlikely. However, you should keep your property taxes and homeowner’s insurance up to date, and of course, you should keep your property from getting damaged and decreasing in value.
A reverse mortgage only matures and must be paid when you finally sell your home, or when you live elsewhere for more than a year, or when you die (or the last surviving borrower dies). At the time of your death, your heirs repay the lender of the money collected from the sale of the home.
- How about Math?
A reverse mortgage uses the appraised value for the home, which is ‘bounded’ to the average home value for the specific area of the state in which you live. Fannie Mae’s sponsored ‘housekeeper’ program is worth $417,000 (and probably still is). Of course, if the value of your appraised house is higher, you can borrow up to the allowable limit.
To save on accrued interest costs, a lump sum amount may not be a good idea. Better would be the choice to take monthly payment or line of credit. A well-known national association conducted a study in which they examined this example: a borrower, 74 years old, with a $300,000 home will pay about $15,000 in upfront costs plus (over the life of the loan) and another $15,000 each month in insurance premiums and service fees over the life of the loan. Many financial planners point out that interest owed (which is paid after your death) is not tax-deductible and the longer the term of the loan (the longer you live) the higher the amount of interest to be paid.
- What is a Safety Valve?
First, you can’t get a reverse mortgage without screening. Under federal law, when considering a reverse mortgage and before you apply for a loan, you must consult a HUD-approved counselor either over the phone or in person. Second, the math has to work. If your home is undervalued compared to your current mortgage, you will not qualify. On the other hand, if your equity-to-value ratio is favorable, chances are you will qualify (once you meet with a HUD-qualified counselor).
- Consider Your Options Carefully
There are specific analytics templates you may want to consider. You can use an online calculator to enter your age, the estimated value of the home, and the postal code where the home is located (to see if your home is under the FHA limit in your area). The template then calculates your options which can be sorted by loan amount or interest rate. To find an online calculator, visit www.goldengateway.com and see if the numbers suit your situation.