In the midst of the current credit crunch, we tend to overlook the financial needs of senior homeowners, especially those who own their homes free and clear or are pretty close to being debt free. However, these homeowners often experience their own credit crisis – having loads of equity locked up in their homes and not being able to get at it. President Obama's plan is not designed to bail them out, and many don't qualify for refinancing to cash out some or all of their equity.
Fortunately, homeowners 62 years and older can often bail themselves out of financial trouble with a reverse mortgage. With a reverse mortgage, the homeowners have no monthly mortgage payment. Instead, the "lender" makes payments to the homeowner out of the equity in the home. The payment plan can be in any of the following forms:
- Tenure: Equal monthly payments as long as at least one borrower lives and continues to occupy the property as a principle residence.
- Term: Equal monthly payments for a fixed number of months specified by the borrower.
- Line of Credit: Borrowers draw payments against a pre-established line of credit until the line of credit is exhausted.
- Modified Tenure: Combination of line of credit with monthly payments for as long as at least one borrower continues to occupy the property as a principle residence.
- Modified Term: Combination of line of credit plus monthly payments for a fixed number of months specified by the borrower.
HUD's Federal Housing Administration (FHA) created one of the first reverse mortgage programs, called the Home Equity Conversion Mortgage (HECM). With HUD's HECM , homeowners don't have to repay the "loan" as long as one or more of the borrowers continues to live in the home and is able to keep the property taxes and homeowner insurance current. The initial loan is calculated based on life expectancy tables known as actuarial tables. Even if the homeowner outlives the statistical estimate, they will not have a mortgage payment.
According to HUD, the lender cannot take the home if the borrower outlives the loan.
"You do not need to repay the loan as long as you or one of the borrowers continues to live in the house and keeps the taxes and insurance current. You can never owe more than the value of your home at the time you or your heirs sell the home. "When you sell your home, you or your estate will repay the cash you received from the reverse mortgage plus interest and other fees, to the lender. The remaining equity in your home, if any, belongs to you or to your heirs."
To qualify for a Home Equity Conversion Mortgage, the homeowner/borrower must:
- Be 62 years of age or older
- Own a residential property – single-family home or 1-4 unit home in which you live in one of the units (HUD-approved condominiums and manufactured homes that meet FHA requirements are also eligible.)
- Own your home outright or have a low mortgage balance that can be paid off at closing with proceeds from the reverse loan
- Live in the home and use it as the principle residence
Encourage seniors who have plenty of equity in their home and are having trouble keeping up with monthly expenses to find out more about the reverse mortgage option. They can obtain an HECM through an FHA lender, so advise against paying a third-party service for a reference. HUD recommends that homeowners track down a lender on their own or by:
- Contacting AARP toll free at (800) 209-8085
- Calling the Housing Counseling Clearinghouse on (800) 569-4287 for the name and telephone number of a HUD-approved counseling agency
- Searching the directory of HUD Approved Housing Counseling Agencies
For additional details about HUD's HECM, check out Home Equity Conversion Mortgages for Seniors.
Caution If you know homeowners in your market who are 62 years or older, are having trouble making ends meet, and have plenty of equity in their homes, encourage them to explore the reverse mortgage option, but stop short of recommending it. It is not the best option for everyone. Homeowners should consider the following:
- Up-front fees, which can be very steep; for example, up to $12,000 on a $275,000 home
- How long they plan on owning and residing in the home – if they plan on keeping the home for only a few years, the up-front costs may not be justified
- The fact that they will be drawing equity from the property
- What their plans are for passing the property to their heirs
- Whether other, less costly, options are available for obtaining the cash they need Prior to signing for a reverse mortgage, homeowners should know the costs and what it will mean for them one, five, ten, and perhaps even twenty years down the road.
During these tough economic times, homeowners must become aware of all the options and programs available for keeping their homes and making them more affordable. For homeowners 62 years and older who have a substantial amount of equity in their homes, cashing out that equity over time with a reverse mortgage may provide them with the supplemental income they need to cover their living expenses, catch up on unexpected bills, finance essential home repairs, and keep their home.