Advantages of a Reverse Mortgage
If you are 62 or older, you may want to consider a Reverse Mortgage on your home. Reverse Mortgages have improved in recent years, and may bring you important benefits at a lower cost. If you owe very little or nothing on your home, you can use a Reverse Mortgage (FHA-insured Home Equity Conversion Mortgage, or HECM) to live on your equity without mortgage payments, for the rest of your life:
- Obtain the equity in your home now, in monthly installments, or as a line of credit.
- Live in and own your home without mortgage payments–as long as you occupy your home–regardless of your age or the amount of equity left in the home.
Homeowners with larger existing mortgage balances can pay off their mortgage with a Reverse Mortgage, obtaining immediate payment relief of principal and interest, and potentially collect equity if the approved loan size is larger than the current pay off amount. Reverse Mortgages can also be used to purchase a primary residence if you can pay upfront the difference in the cost of the home and the amount of the Reverse Mortgage.
You’ll own your home as long as you live, without mortgage payments, independent of the future value of your home.
Your responsibility is limited only to paying annual property taxes and insurance. You must also maintain your home and complete typical repairs.
When it is time to sell your home, if the future value of your home is less than the amount of the Reverse Mortgage, your estate owes nothing to the lender, as long as the house is sold at whatever price the marketplace will bear at the time. As a non-recourse loan, any deficiency is waived. If the property is sold for an amount over and above the balance on the Reverse Mortgage the remaining value of the home goes to you or your heirs. A Reverse Mortgage can also be refinanced by you or your heirs, if they decide to retain ownership of the property rather than sell it.
The largest FHA-insured Reverse Mortgage available in Marin during 2011 is $625,500. Maximum Loan limits are County-specific. If your mortgage exceeds the current FHA limits, there are portfolio products that offer Reverse Mortgages for homes up to values of approximately $6 million.
Income from a Reverse Mortgage is not taxable as it is your equity–and your Social Security and Medicare benefits are not affected although some Supplemental government assistance programs may.
Costs of a Reverse Mortgage
These are the potential costs of a Reverse Mortgage:
- Origination fee paid to a lender can be up to 2% of the first $200,000 of your home’s value plus 1% of the amount over $200,000, with a cap of $6,000. This can be completely waived at slightly higher interest rates.
- Mortgage Insurance: Initial and Annual, paid to the U.S. Department of Housing and Urban Development (HUD). The initial amount can be financed and the annual amount is included in the loan.
- A possible Monthly Service Fee of $30 or $35 paid to the lender.
The initial mortgage insurance fee is either 2% (HECM Standard) or .01% (HECM Saver) of the lowest amount of $625,500 or the property value, whichever is less. Choosing the “Saver” option reduces the maximum loan size. You can finance this initial mortgage insurance payment in your mortgage and therefore not need have an out-of-pocket expense.
Annual mortgage insurance equals 1.25% of the mortgage balance but is included in your loan, not paid for separately.
For a Reverse Mortgage of $625,500, these are the maximum fees you might pay:
- $6,000 origination fee, potentially waived on fixed-rate Reverse Mortgages in exchange for slightly higher rates.
- $12,500 initial mortgage insurance, but this fee may be financed.
- $7,819 per year or $652 per month for annual mortgage insurance, but this is also covered by the loan, not paid for separately
- $420 per year or $35 per month for a loan service fee, although some lenders to not charge.
Is a Reverse Mortgage Right for You?
If you plan to stay in your home more than a few years and you owe nothing or a small amount on your home and you want to receive tax free income from the equity in your home, or you desire to pay off your current balance and eliminate your monthly mortgage payment, a Reverse Mortgage is worth considering.
There are many factors to think about, but fortunately the government requires that you obtain counseling before making a decision. You might start by talking to a local, qualified mortgage broker. Madeline Schaider Real Estate recommends Lisa Fonarow and Shayne Alaniz, our experts on Reverse Mortgages. You can reach them at (415) 925-5225, ext. 213.