Reverse Mortgage
Reverse mortgages allow home owners to use the equity in their homes, sometimes even helping them to pay off their existing mortgage balance and they are able to live in their homes for as long as they wish. Reverse mortgage new rules are helping to make the loans more feasible to millions more seniors by raising the dollar values of properties that are elegible for the program and even extending it to the purchase of new homes. The federal program lets borrowers pay a one time insurance premium, and it guarantees that they will receive income that they are promised when they take out a reverse mortgage. Seniors retirement funds have been damaged by declining investments and the collapse of the housing market, and reverse mortgages are seen as an increasingly attractive way for senior citizens to stay in their homes while supplementing their income. However, reverse mortgage rates can be high, and those sold without federal backing have created problems for the industry in its past. Even with government backing, fees are still high and the loans are very complex, so it’s important that borrowers know exactly what they are getting and that they get good advice regarding a reverse mortgage.
Twenty years ago the Federal Housing Administration began to create a new, federally backed reverse mortgage product known as the Home Equity Conversion Mortgage. Home Equity Conversion Mortgages are loans where borrowers and their families are never responsible for any loan losses experienced by lenders. Losses can easily occur when borrowers continue to live in their homes for long periods after the Home Equity Conversion Mortgage is issued. Because Home Equity Conversion Mortgages are insured by the federal government, the amount of a borrower’s cash-loan proceeds are guaranteed and protected from lender defaults as well as declines in value of their homes during the life of the reverse mortgage. If the home’s value rises, however, the gains benefit the borrower who continues to own the house until either they die or move out. At that time, if the home has positive equity, the homeowner’s heirs have up to a year to pay off the loan and keep the home, or sell it. If the loan is upside down, homeowners can simply walk away with no obligations and the lender will take possession of the title of the home.
Recently, the ceiling for Home Equity Conversion Mortgages increased from $200,000 to $417,000 in some parts of the country. It increasingly enables more homes to qualify for the program. Lender fees have been capped at $6,000, and it helped to curb overall Home Equity Conversion Mortgage Fees. Now, the Home Equity Conversion Mortgage proceeds can be used for the purchase of new homes. This is to make the program more attractive to seniors who want to move into a smaller home or to a new location for their retirement.
However, the AARP urges borrowers to only draw upon their equity in the amount needed. The remaining proceeds should be used as an available line of credit that can actually rise in value over time. This is because the Home Equity Conversion Mortgage loan levies the interest rate on what the borrower draws. If the money isn’t used, then the borrowing cost for those funds is credited to the remaining equity in the home. This allows the borrower to keep costs minimal and maximize the value of their loan. Everyone considering a reverse mortgage must see a counselor, who will advise them of the costs and risks associated with the loan, and the benefits. They will help the borrower pick the best loan for their situation.