Dear Savvy Senior,
What can you tell me about reverse mortgages? I was considering one a few years ago but decided against it because it was too expensive. But now I hear they are much more affordable. What can you tell me?
Looking for Cash
One of the biggest drawbacks of reverse mortgages over the years has been the high upfront costs. But now, thanks to some new federal rules and reduced lender fees, reverse mortgages are much cheaper for cash-strapped retirees to get into. Here’s what you should know.
Let’s start with a quick review. A reverse mortgage is a unique loan that lets older homeowners convert part of the equity in their home into cash that doesn’t have to be paid back as long as they live there. To be eligible you must be age 62 or older, own your home (or owe only a small balance) and currently be living there. There’s no income qualification. You can receive the cash either as a lump sum, a line of credit, regular monthly checks or a combination of these. And with a reverse mortgage, you, not the bank, own the house, so you’re still responsible for property taxes, insurance and repairs.
Repayment is due when you or the last borrower dies, sells the place or lives elsewhere for 12 months. Then you or your heirs will have to pay off the loan (which includes the money you borrowed plus accrued interest and fees) either with the proceeds from selling the place, or if you want to keep the house, with money from another source.
Most reverse mortgages on the market today are known as Home Equity Conversion Mortgage (HECM), which are backed by the Federal Housing Administration (FHA). The big complaint about HECMs has always been the high upfront fees, which include a 2 percent loan origination fee, 2 percent mortgage insurance, along with appraisal fee, closing costs and other miscellaneous expenses. All told, the cost of getting a HECM can run around 5 percent of the value of your home.
But starting last fall, the FHA introduced a new HECM “Saver” loan that offers a smaller loan amount that’s about 40 percent cheaper than a traditional HECM has been (which is now known as the HECM “Standard”). The new Saver loan virtually eliminated the 2 percent upfront insurance premium to create the savings.
But with the Saver, the amount you can borrow is about 10 to 20 percent less than what you could get with the HECM Standard. So, for example, a 70-year-old with a home worth $300,000 could get a lump sum of about $149,000 with a Saver, versus around $187,000 with a Standard loan. To calculate how much you may be able to borrow visit www.rmaarp.com.
Lender Fee Cuts
You also need to know that as a way to drum up business, many lenders today – like Generation Mortgage, MetLife Bank, Bank of America, Wells Fargo and others – are waiving loan-origination fees and other upfront charges on some loans, which could also save you thousands of dollars. Most lenders, however, are offering these deals only to fixed-rate HECMs that require borrowers to take out a lump sum. The cuts are generally not available to adjustable-rate loans that can be taken as a line of credit or in monthly payments.
Because reverse mortgages are very complicated, you’re required by the government to first meet with an independent counselor to make sure you completely understand how they work. Counseling can be done in person or over the phone and many counseling agencies today provide it for free or at a minimal fee. Some locations charge around $125. For more information on reverse mortgages, or to locate counseling agencies in your area, visit hud.gov/offices/hsg/sfh/hecm/hecmhome.cfm or call 800-569-4287.
Send your senior questions to: Savvy Senior, P.O. Box 5443, Norman, OK 73070, or visit SavvySenior.org. Jim Miller is a contributor to the NBC Today show and author of “The Savvy Senior” book.