How You Can Benefit from a Reverse Mortgage
Home Equity Conversion Mortgages (HECM) – or reverse mortgages as they are more commonly referred to – have gotten a bad rap over the years. This is likely due to the fact that before 2011, they were expensive, complex, and only benefited those retirees who were facing financial hardship. But at their core, reverse mortgages were designed to allow aging homeowners to convert the equity in their homes into monthly payments or a line of credit so they can remain in their homes after retirement. Allowing borrowers to use reverse mortgage loan proceeds during down markets lets them avoid depleting their savings. Moreover, recent changes to HECMs have made them compatible with traditional home mortgages, offering an excellent value to borrowers age 62 or older.
Better Terms and Enhanced Consumer Protection
The mortgage industry has changed drastically in recent years and now provides improved protection for consumers. Overall, a better enforced, more stringent underwriting process serves to eliminate potential borrowers whose credit and financial background have rendered them incapable of repaying a mortgage. And The Reverse Mortgage Stabilization Act of 2013 safeguards HECM borrowers from withdrawing too much equity too soon, while also ensuring that younger spouses (under 62) who are ineligible to be co-borrowers are able to remain in the home after the older spouse dies.
With initial setup fees that have been reduced from 2.5% to 0.5% of the loan amount, reverse mortgages are now much more accessible to qualified borrowers who draw less than 60% of their available balance in the first year. Closing costs for reverse mortgages are on par with those for traditional mortgages and home equity lines and can sometimes be discounted and/or rolled into the loan. There is a mandatory consumer counseling fee of $125, which is often the only up-front cost borrowers must pay to implement a reverse mortgage.
How Reverse Mortgages Work
Unlike a traditional mortgage or home equity line of credit, reverse mortgages do not have to use the same income qualifications. This is enticing for retirees who may be on a fixed income. To qualify, borrowers must be at least 62 years old. Reverse mortgage lenders determine loan amount eligibility by factoring in their margin, the home’s available equity, the age of the youngest borrower, and current interest rates.
There is a maximum home value limit of $625,500, and homeowners can use approximately half of their home’s appraised value (contingent on their age). Lenders typically grant larger loans to older borrowers who qualify for lower interest rates.
Borrowers who do not own their home outright must use the proceeds of the reverse mortgage to pay off the balance of their existing mortgage. This allows them to retain ownership of the home as long as they continue to maintain it and pay their property taxes and homeowner’s insurance.
Borrowers can then take tax-free distributions in the form of monthly payments for a specified amount of time. Monthly interest is accrued solely on the amount borrowed, and borrowers do not have to repay the loan until the last borrower is either deceased, sells, or otherwise vacates the home. The fact that it is a non-recourse loan ensures that borrowers will never owe more than the home’s worth regardless of whether the value is less than the loan balance.
If you think you could benefit from a reverse mortgage, contact a Cliffco Mortgage Bankers loan specialist at (516) 408-7300 or complete the short form here.