Reverse mortgages have proven a savior to many a senior citizen struggling with the ravages of the recession economy in this day and age. Reverse mortgages, which are technically called Home Equity Conversion Mortgages, are a financial product made available to homeowners when the youngest homeowner listed on the title is sixty-two years old or older. Homeowners availing themselves of this option are able to tap into the equity in their homes and cash it out, using the funds to either pay off debts or to supplement an insufficient fixed income. The loan is paid off when the homeowners pass away or move out and the home is subsequently sold. Reverse mortgages would be better-received by consumer advocates if it weren’t for the fact that the associated fees are so high. Some elderly homeowners have also used the proceeds from reverse mortgages for inappropriate or unwise investments. At least one of these worries will be assuaged, however, by a new reverse mortgage product expected to soon go into wide circulation, one that carries much lower fees.
The National Reverse Mortgage Lenders Association (NRMLA) issued a press release late last week touting the new reverse mortgage terms, which have already been approved by the Federal Housing Authority. Details are not final and remain in the process of discussions, said NRMLA spokesperson Lemar Wooley, but the news is nonetheless exciting.
In exchange for charging lower fees for reverse mortgages, homeowners seeking one of these “Saver” loans would be eligible to cash in ten to eighteen percent less equity on their homes. This is intended to keep the FHA from losing money the way it has been doing on current reverse mortgages. The large fees for current reverse mortgages come from the fact that the government has collected an upfront two percent insurance premium on the mortgages. The “HECM Saver” loans will eliminate the need for that insurance policy, since the percentage borrowed against the home’s equity is not nearly as great. Losses will hopefully become much lower, and the government will stop losing money. Both the Saver loan and the old-style reverse mortgages, now called “HEMC Standard” loans, will be available side-by-side in October.
Many prospective reverse mortgage candidates have been historically deterred by the high upfront costs of processing such a loan. Luckily, the Saver version of the reverse mortgage will still allow seniors to access money they need to use for crucial living expenses, without having to scrimp, save, and borrow to pay two percent of the home’s value upfront. They’ll get less money, but it’s believed that the Saver product will fulfill a pressing need. The percentage of a home’s equity that can be tapped with a reverse mortgage depends on many factors, including the age of the homeowner(s). Any equity in the home will first be used to pay off the existing mortgage balance. That’s why experts say that HEMCs are best suited for those who completely own their homes or only owe very little on them in payments. Whatever money is left after the mortgage is paid off is doled out either as a lump sum or in the form of lifetime monthly payments. Alternately, the funds can be accessed as a line of credit similar to that of a HELOC. The reverse mortgage lines of credit are backed by the government, so there is no worry that they will suddenly dry up in the way that many consumers’ home equity lines of credit did when the economy soured. Homeowners need make no further mortgage payments and can live in the home as long as they’re able. They must continue to pay any taxes and home insurance, of course, and maintain the property, but they are essentially getting paid to live in their own homes. Paying back the borrowed money would of course cancel the reverse mortgage at any time.
When the homeowners pass away or leave the home – say, for a nursing home or to reside with family members – any equity remaining in the home can be bequeathed to heirs. Depending on how long the loan has been outstanding, the lender might well end up upside down on the loan if the property has lost a lot of value over the years. Since reverse mortgages are non-recourse loans, however, this is not a problem for homeowners or heirs. As long as the money from these mortgages is being used sensibly and ideally for paying for living expenses, there is no good reason why the elderly should not turn to this exceptional financial option – especially nowadays, with a greater range of choices available.
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