With people living longer, healthier lives, today’s retirees on average enjoy a much longer retirement than that of their parents’ generation.But a longer retirement, combined with rising medical expenses and property taxes, means having to be more resourceful at finding ways to fund those golden years.
And on that front, there’s good news for seniors who own their homes and want to continue living in them. Despite higher property taxes, utility bills and other costs, reverse mortgages have just become more attractive.
Competition is heating up in the reverse-mortgage market. That means that banks are cutting margins, which gives seniors more money, and lenders are creating more options for withdrawing that money.
How Reverse Mortgages Work
Aptly named, the reverse mortgage works the opposite way a regular mortgage does. In a regular mortgage, you make payments to the lender. But with a reverse mortgage, the lender makes payments to you. To qualify for one, you must be at least 62 years old and own your own home.
You can receive your reverse mortgage payments either in a lump sum, as a monthly cash advance, as a line of credit that allows you to decide when and how much is paid to you or as a combination of all of those.
Granted, this is a scary concept for the frugal seniors who have spent a lifetime paying down the mortgage, and the conventional wisdom has generally been that you should try to avoid taking on debt during retirement. However, with reverse mortgages, you remain in control of your property and can sell at any time. The loan is only repaid when you sell your home, permanently move out of it, or die. And no matter how long you live, you can’t be forced out of your home.
The amount you can get depends on your age, interest rates and the current appraised value of your home. These funds are distributed to you tax-free, either as a lump sum (for example to pay off a mortgage balance), a line of credit or lifetime monthly checks — depending on how you set it up. The older you are, and the slower the interest rate, the more money you are eligible to receive.
Interest accumulates only on the funds you withdraw over your lifetime. You make no payments to the lender. The money you withdraw is yours to spend for any purpose. Upon the sale of the house, any remaining equity goes to you or your heirs.
You or your heirs can never owe more than the house is worth — no matter how long you live and receive those monthly checks. The bank is protected against the possibility that you live longer than expected by FHA mortgage insurance on most reverse mortgages.
Important Considerations
However, there are some factors to be mindful of. Because you’re essentially borrowing money from your mortgage, your debt in the home will grow just as your equity in it decreases. Also, when a reverse mortgage becomes due and payable, you may owe a lot of money and your equity may be very small. In fact, if you have the loan for a long time, or if the value of your home decreases, there may not be any equity left at the end of the loan.
FHA reverse mortgages have county-specific lending limits that cap the amount of equity available. There are also “jumbo” reverse mortgages for those with more-highly valued homes. These jumbo reverse mortgages typically require the borrower to take a lump sum instead of monthly checks, but the fees are generally lower than those on FHA reverse mortgages.
The fees involved in FHA reverse mortgages average 5% of the property value, so you should only consider this option if you plan to stay in your home for more than a few years. If you have a shorter time horizon, you might be better off selling the home, paying capital gains taxes after the $250,000 exclusion ($500,000 for couples) and using the remaining money to rent a place to live.
Before they can be finalized, reverse mortgages require independent counseling to make sure they are an appropriate strategy. This is frequently done by AARP and other not-for-profit counselors.
New Deals in Reverse Mortgages
Pat Donohue, a certified senior advisor with Westmont, Ill.-based 1st Reverse Financial Services, says seniors are about to get more choices and better options in reverse mortgages. For example, he points out, Bank of New York has just started offering a new, lower rate on the most popular FHA product, the Home Equity Conversion Mortgage.
Until now, the HECM had a monthly adjustable interest rate that was 1.5% above the 1-year Treasury note rate. But starting this month, it will charge only 1% above the same index. (The rate for this HECM 100 was 6.97% as of Feb. 13.)
That small half-a-percentage-point difference may not seem significant, but it could add anywhere from $3,000 to $14,000 to the amount that can be withdrawn. You’ll need to work with a Reverse Mortgage lender who carries that product.
To see how much money you might qualify for with an FHA reverse mortgage, go to ReverseMortgage.org and use its online calculator; you can also search for a reverse mortgage lender in your area.
Don’t let fear or complexity deter you from considering a reverse mortgage. For seniors who love their homes, this is the reward for a lifetime of mortgage payments. And that’s the Savage Truth.
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