Ah, the golden years. But in these post-crisis times, many seniors are spending more time worrying about the roof over their heads than what hobby to pick up next. Some seniors are among the millions of Americans facing foreclosure because they can't afford to continue making the payments. Others are struggling with rising medical bills or simply can't continue to pay the mortgage on their fixed-income. These are three of the primary reasons seniors consider reverse mortgages -- a type of equity loan that is on the rise. Seniors who need to cash out on the equity of their home have several options:
- They can sell the larger home and use the equity to buy a smaller home for cash and maybe have something left over to help pay the bills.
- They can take an equity line to tap the equity that has built up over the years, but they must be able to afford to make the payments
- They can use a reverse mortgage, tap their equity and have no mortgage payments to make.
First let's look at who is eligible. You must be at least 62 years old and use the home as your principal residence. You must own your home outright or have a low mortgage balance that can be paid off with the closing proceeds from the reverse mortgage. You can also use a reverse mortgage to buy a new primary residence if you are able to come up with the cash to pay the difference between the reverse mortgage proceeds and the sales price plus closing costs for the property you want to purchase. By using a reverse mortgage you'll never have to make a payment on that home.
The best program out their is the FHA's Home Equity Conversion Mortgage. There are other private options but they are usually more expensive. If you're thinking of using a reverse mortgage your first call should be to a Housing Counselor at the FHA's Clearinghouse. You can find an approved counselor by calling 1-800-569-4287.
If all you need is money to fix up the house, then you may be better off checking with your state or local governments to see if they have any "public sector" reverse loans available for help with paying for home repairs or property taxes. These public sector loans usually have lower interest rates and lower fees.
So what's the downside? Reverse mortgages come with hefty costs. Loan fees are based on the full value of a home, which can be as high as $625,500 (the national program limit). That differs from a traditional mortgage where the loan fees are based on the amount you borrow. You can't write off the interest until the loan is paid in full, so interest builds up each year increasing the amount of the loan.
If you were planning to leave the home to your heirs, you may find out that too much is owed on the property to be worth if for your heirs to take it. The good news is that if the home is worth less than the loan principal due, your heirs will not have to pay the difference. You also can't be kicked out of your principal residence even if your loan principal due rises above the current market value. But, if you decide to sell the home, you also won't get any cash from the sale unless the house sells for more than what is currently due on the loan.
There are other costs, too. You'll usually end up paying between 5 and 6 percent of the home's value in closing costs. And variable-rate interest payments get added to the outstanding principal, in addition to $25-$35 monthly servicing fees and annual FHA insurance payments (equal to half a percent of the loan's value).
So who should even consider a reverse mortgage? If you're not worried about your heirs getting the home and you need cash now, a reverse mortgage may be a good option for you. Also if you can no longer afford you mortgage payments and have a low mortgage balance, you can pay off that balance, have no more monthly payments and get some cash in your pocket as well.
Lita Epstein has written more than 25 books including Working After Retirement for Dummies and The Complete Idiot's Guide to Social Security and Medicare.