Selling a home isn’t an option for every homeowner, especially in today’s real estate market. If you’re house rich and cash poor, you might be looking for ways to tap into your home’s equity in order to have enough money to live on.
A reverse mortgage is a government-insured home loan that lets homeowners convert a portion of the equity in their home into cash. A reverse mortgage may also be referred to as a home equity conversion mortgage (HECM).
The key difference between a reverse mortgage and a traditional home equity loan is that reverse mortgage consumers must be age 62 or older, must own the home outright (or have a low mortgage balance that can be paid off at closing with proceeds from the reverse loan), and must live in the home. The Federal Housing Administration (FHA) also requires consumers to attend a counseling session with an approved HECM counselor prior to obtaining the loan.
Unlike a traditional home equity loan or second mortgage, reverse mortgage borrowers do not have to repay the HECM loan until the borrowers no longer use the home as their principal residence or until they fail to meet the obligations of the mortgage.
It’s important to note that while the government insures HECMs (through the FHA), HECMs are not government loans. They are loans issued by banks.
The National Reverse Mortgage Lenders Association (NRMLA) is introducing a new information source for consumers interested in reverse mortgages. The website and the NRMLA’s 24-page road map booklet, titled “Borrow with Confidence,” combine to create a comprehensive resource that explains every aspect of a reverse mortgage.
Before you talk to a reverse mortgage lender, it’s a good idea to educate yourself on the types of reverse mortgages available. It’s important to understand which one suits you best and to find a lender that can offer it to you.
Types of reverse mortgages
1. HECM standard
Traditional HECMs began as a lending practice in 1989. There are currently more than 500,000 issued HECMs in the market.
Cost: Fees include an origination fee, an upfront mortgage insurance premium (MIP), a servicing fee, and traditional closing costs. “It’s the upfront mortgage insurance premium paid to HUD/FHA/FED that adds a cost,” says Peter Bell, president of the NRMLA. “[That premium is] 2 percent of the value of the home at the time of origination.”
Target: Senior homeowners who need the most money available to them.
2. HECM saver
The HECM saver is a lower-cost version of a HECM Standard. HUD and the FHA introduced it in October 2010. Since the introduction of the HECM saver, a new group of seniors have entered the market who might not have chosen a reverse mortgage before. The HECM saver is low risk and has more maneuverability, according to Kelly Sabino of US Mortgage Corporation.
Cost: Saving money comes from a lower upfront MIP and only a .01 percent upfront PMI premium. With the lower mortgage premium, the borrower gets a reduced amount of money available, ranging from 10 to 18 percent less than the traditional product, depending on age.
Target: Seniors who don’t need as much liquid cash and/or who don’t want to pay the higher fees. The NRMLA notes, “Because the fees are lower, and no monthly payment is required, it may also prove to be a better option than obtaining a home equity line of credit.”
The HECM saver borrowers are savvier, and they tend to have a more of an investment portfolio. They want to leverage their home, but still protect the equity.
3. HECM for purchase
The previously mentioned HECMs are most commonly used to eliminate debts, pay for healthcare and cover daily living expenses. However, the HECM for purchase is increasingly being used by seniors to purchase a home that better suits their needs.
It’s a different kind of home buying process. For example, a senior can take the proceeds of a HECM loan, pay off their existing mortgage, and downsize into a new home that better suits their needs. They may need to supplement the reverse mortgage proceeds with funds from selling a home, private savings, gift money, or other sources of income.
Cost: No monthly mortgage payments. Home-buying process costs could be covered, depending on the house into which you downsize.
Target: Seniors looking to downsize their home or move to a house that better suits their current needs and who do not need to use the money from a HECM.
4. Proprietary reverse mortgages
Right now, very few proprietary reverse mortgages exist. Proprietary reverse mortgages are sometimes called “jumbo” reverse mortgages because they are taken on higher-valued homes. These loans are not insured by the FHA, but they are backed by the companies that develop them. According to the FTC, these “jumbo” reverse mortgages are more expensive because, “the more you borrow, the higher your costs.”
These loans aren’t readily available in today’s tight lending market, but if your lender offers you a proprietary loan, ask to see a side-by-side comparison of the costs and benefits between a HECM and a proprietary loan.
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Ilyce R. Glink is the author of several books, including 100 Questions Every First-Time Home Buyer Should Ask and Buy, Close, Move In!. She blogs about money and real estate at ThinkGlink.com and at the Home Equity blog for CBS MoneyWatch.