Reverse mortgages can provide tension in families, specially those who are depending or relying on their parents properties after they pass away. Family is a difficult subject and always very emotional, and with this we try to provide logical information for heirs.
Know upfront that your heirs/kids will never be responsible for paying any debt which exceeds the home’s value (non-recourse loan) which is guaranteed by government to protect your heirs – this means that if you take a reverse mortgage now – and in 20 years time your home is not worth the amount you owe on the mortgage, your heirs will not have to pay a single penny – FHA will cover the difference when the bank sells the home (your heirs have the ability to buy the home or refinance the loan as they wish – even if the home is worth less in the future).
It is your responsibility to help your parents decided whether or not they should even be considering such a mortgage, we understand you also have you own life to juggle, and this is why we have a straight forward approach to providing you with necessary information to help you make a decision for them.
Who can qualify for a reverse mortgage?
You parents must be at least 62 years old, own the home, and live in home as their primary residence. You don’t have to worry about credit scores or income, as this is not a requirement for a reverse mortgage.
How does a reverse mortgage work? Seniors who qualify will be able to release equity from their homes
Did you know there are some 4 HECM programs to choose from?
HECM FIXED STANDARD OPTION
HECM Fixed Standard – main features
§ Fixed interest rate
§ Upfront lump sum (funds are not taxed)
§ Upfront mortgage insurance premium is 2%
§ Pay interest on full lump sum you borrow
Designed for seniors who want or need the maximum amount of equity out of their homes and are also interested in a fixed interest rate. You will pay the full 2% upfront mortgage insurance to FHA (belongs with the upfront fees) and with the right reverse lender we can even eliminate the origination fees.
Currently many seniors who have a first mortgage or large liens against the home are utilizing the HECM Fixed Rate Option to pay off their existing debts while being able to borrow more equity out of the home without selling. With rates this low seniors are looking improve retirement cash flow by getting rid the debt payments, while this is a costly option it works very well for many seniors (specially when taking home appreciation and offset savings from higher interest mortgage loans).
HECM ADJUSTABLE STANDARD OPTION
HECM Adjustable Standard – main features
§ Adjustable interest rate
§ Select how receiving the income/funds (credit line, monthly income)
§ Upfront mip 2%
§ Pay interest on amount borrowed only
Seniors who also want the full equity out but do not mind taking an adjustable rate mortgage option that has lower interest rates due. You will also be liable for the 2% upfront mortgage insurance which goes into the loan costs, lenders will most likely charge an upfront origination fee of 1-2%.
The lower adjustable rates can come in handy when you need some new income/funds in your retirement and have plans to sell the home in a few years. Seniors can also look at this option to pay off an existing mortgage, as the adjustable rates are very low right now.
HECM SAVER FIXED OPTION
HECM Saver Fixed – main features
§ Receive a lump sum upfront
§ Income is never taxed
§ Upfront mortgage insurance premium .01% (substantial savings)
§ Pay interest on full amount upfront
§ Less equity available compared to HECM standard
Pay less in upfront mortgage insurance (.01%), receive a smaller portion of the homes equity and get into a fixed rate option – this is usually utilized by seniors who have a substantial amount of equity in the home – money will come as a credit line or as monthly income (or combination).
HECM SAVER ADJUSTABLE OPTION
HECM Saver Adjustable –
§ Receive credit line or monthly income
§ Not taxed (never taxed)
§ upfront mip .01% (substantial savings )
§ pay interest on borrowed portion only
§ less equity available compared to HECM standard programs
Dont mind an adjustable rate mortgage or receiving less of your homes equity – also utilized by seniors with more equity in the homes – this can be one of the cheapest options of the HECM loans as the interest rates for the adjustable programs are the lowest – mortgage insurance is also (.01%) thus savings is realized with this option.
Yes, at all times your parents or their estate will own the property, the reverse mortgage works as regular mortgage in this case and there is no need to worry about the bank stealing the home.
Who guarantees these loans, are they safe?
Reverse mortgages are FHA guaranteed, meaning they are backed by the federal government with no risk of default ever, this is the safest mortgage option. If you or your parents decide that they want to receive a lifetime monthly income option – this is essentially the same as an annuity – but without the risk of a private annuity from a insurance company ( they can go bust and your investment will return 0).
What happens if one spouse is not 62 and is living in the home?
This is where the loan can get tricky – the loan terms state that if anything were to happen to the borrower who is on the loan ( pass away or move out of the home ) then the loan will become due. So if a spouse or another family member plans to live in the home if anything happens to the borrower the loan will come due – the only way to prevent this is to either put the spouse or other family member on the loan ( must be 62 and meet the other HECM qualifications) or have a plan for where they will live once the borrower passes.
Once my Parents Move Out What Are My Options?
As the heir you will have the right to sell the home, refinance, or keep the home if the property was assigned to you by your parents estate. You will own the home and have to pay off the reverse mortgage loan, simple.
§ selling ( most advisable when you have no intentions of living in the home and there is enough equity to cover HECM loan – in some cases you will also profit from the sale.)
§ refinance ( you are given a time period (reasonable) enough to find a new financing source – you can refinance the loan into a forward loan or a reverse one.)
§ keep home pay off using other assets or savings
You will never be responsible for their debt ( non-recourse loan structured to protect you)- if you wish you can simply let the bank take back the home – this is recommended when the home’s value drop significantly – this menas that your parents got to use the home’s equity but now that they have passed the debt burden if not your’s but the federal governments.
HECM Saver – the best alternative to any seniors considering a home equity line of credit or home equity loan – Learn how the HECM Saver can benefit your retirement.
The HECM Saver is one of the U.S. Department of Housing and Urban Development’s reverse mortgage products where the upfront loan closing costs are lower than those associated with a standard HECM (Home Equity Conversion Mortgage) reverse mortgage. For those who are approaching retirement age and don’t have a retirement plan in place, the HECM Saver is a cost-effective way to finance this stage in life and can bring peace of mind.
Before going into the details, a brief explanation of a reverse mortgage is needed. A reverse mortgage is a type of equity release and is sometimes referred to as a lifetime mortgage. It is available to homeowners who are over 62 years of age and allows them to access some of the equity in their home they have built up over years or decades of mortgage payments. Borrowers can receive payment in a lump sum or can receive funds in monthly payments.
In other words, a reverse mortgage is a loan against the value of a person’s home. Unlike a traditional loan or home equity loan, no repayment (principal or interest) is required or made until the home is sold or the borrower dies. The entire transaction is structured in such a way that the amount of the reverse mortgage will not exceed the value of the home. For example, with some lending institutions, a reverse mortgage cannot exceed 70% of the home’s appraised value.
Unfortunately, due to the economic reality of the present times, people who have worked all their lives and are approaching retirement age or who have already retired may not have enough money to fund their retirement. People in their 60s who have been paying a mortgage for years or decades might find themselves in a situation where their pensions or other sources of income simply will not be enough to pay the bills. There are several solutions to the problem, but none of the following would be considered ideal. These less than ideal solutions include:
§ Selling the family home and downsizing which is heartbreaking for many
§ Getting a home equity loan which may be too expensive and borrowers risk losing their home if payments aren’t made
§ Renting a room or part of the home to a stranger which means loss of privacy and living space.
§ Doing nothing, which means continuing to pay the mortgage but cutting back on other expensive such as groceries, heating, medicines and other necessities for a comfortable life.
After reading through the above options, one can see why a reverse mortgage makes sense: a homeowner can fund his or her retirement and not worry about paying the amount back until the house is sold or until he or she no longer lives in the residence. However, one complaint that some seniors have about reverse mortgages is that the upfront loan closing costs are simply too high to be affordable. If a house has an appraised value of $500,000, the borrower will need to pay about $10,000 in loan closing costs. For those who are already watching their pennies, the closing costs are too dear.
to find out exactly how much you can borrow please get a free online reverse mortgage quote.
This is where the HECM Saver comes in; although less money can be borrowed, the upfront cost of the loan at closing is reduced by almost 40%. The owner of the previously mentioned $500,000 home will only pay $50 in upfront premiums.
“Despite the popularity of our HECM loan product, we have noted concerns that some senior citizens find that our fees are too high for them,” FHA Commissioner David Stevens stated in 2010. “In response, we created HECM Saver which will provide seniors with a reverse mortgage option that significantly lowers costs by almost eliminating the upfront Mortgage Insurance Premium (MIP) that is required under the standard HECM option.”
The HECM Standard option, which is a regular reverse mortgage offered by HUD and resembles reverse mortgage products offered by other lending institutions and banks, the upfront premium that must be paid at closing is 2 percent of the value of the borrower’s property. With the HECM Saver, the upfront premium is slashed dramatically to only 0.01 percent of the property’s value. For many homeowners who are looking to fund their retirement or simply need some extra cash, the HECM Saver can be a lifeline. The Mortgage Insurance Premium (MIP) for both types of reverse mortgage will be charged on a monthly basis at an annual rate of 1.25 percent of the outstanding balance on the loan.
As mentioned earlier, the amount borrowers receive under the HECM Saver option will be substantially reduced. Borrowers will receive up to 18 percent less than they would under the HECM Standard option. Due to the reduced amount borrowers will receive, the risk to the FHA (Federal Housing Administration) insurance fund is considerably reduced.
to get an idea of how much you can receive use our free HECM calculator online.
HECM Saver and HECM Standard borrowers can choose to receive the funds as a lump sum, as a line of credit or as fixed monthly payments that will continue for as long as they live in their home. As with all reverse mortgages, interest will accrue, but the loan doesn’t need to be repaid until the borrower dies, leaves the home as a primary residence or sells the house. If the balance due on the loan is more than the value of the property when the borrower leaves the home or passes away, the FHA insurance will pay the difference; debt is not transferred to heirs.
If a homeowner has already crunched some numbers and has found that the amount he or she can borrow with the HECM Saver will cover all of his or her needs, then it simply makes more sense to get the HECM Saver rather than a standard reverse mortgage. However, if he or she needs to receive the maximum allowable amount, the HECM Standard will be better, although it will be much more expensive up front.
The HECM Saver makes sense if a homeowner only needs a small amount; if the borrower is only planning on spending a couple more years in his or her home or just wants enough money to renovate a part of the house, it is the most suitable loan. According to Don Redfoot, the AARP’s Public Policy Institute strategic policy advisor: “The HECM Saver is less expensive if you take small loans for short periods.”
In short, if a home is valued at $500,000, a borrower will save almost $10,000 on the cost of the loan.
In a nutshell, to qualify for a reverse mortgage, applicants must:
§ be 62 years of age or older
§ own their primary residence
§ must have equity in their home
§ must have an outstanding balance on the mortgage that is LESS than the loan amount that can be received by an HECM.
§ must never have defaulted on government debt.
Credit checks are not carried out when homeowners apply for an HECM, and applicants to not need to earn a specified income. Applicants will have to go through a counselling session with an HUD representative, and homeowners will still need to pay things such as homeowners insurance premiums and real estate taxes. Failure to pay these could result in the borrower losing his or her home.
HECM Saver and HECM Standard options are meant to be widely available and flexible so that seniors can live their retirement years in relative comfort, free of financial hardship. A general rule of thumb is that older applicants will be eligible to receive more money.
HECM Saver and HECM Standard can be used traditionally, for the purchase of a new home, and for refinancing.
A borrower can opt from one of five payment plans.
§ Line of credit
§ Modified tenure
§ Modified term.
A homeowner can also select one of two interest rate indices:
§ Constant Maturity Rate
§ London Interbank Offered Rate.
And finally, a borrower can select an adjustable rate mortgage (monthly and annual) or a fixed interest rate mortgage.
If you are a senior or are quickly approaching retirement age and want to have some financial security after spending a lifetime of working, rather than sell your home or rent part of it out, consider getting an HECM Saver reverse mortgage. While any type of reverse mortgage will be better than a home equity loan if you don’t have savings or sufficient income, you may want to skip applying for an HECM Standard because the upfront costs can be very high, depending on the value of your home.
Before applying for any sort of reverse mortgage or home equity loan, speak with an HUD counsellor or your financial advisor; making the wrong choice may cost you thousands of dollars and you may lose your home.
If you have questions and want to learn more about reverse mortgages and other financial options that are available, speak with your lending institution or visit the U.S. Department of Housing and Urban Development website. With some help and sound advice, you will be able to finance your retirement and enjoy some deserved peace of mind.