By: Jim Miller
Dear Savvy Senior,
Can you give us a rundown of how reverse mortgages work? I’ve see actors Fred Thompson and Henry Winkler pitching them on TV, and they sound like a good deal. What can you tell me?
—Need the Money
When it comes to celebrity spokespeople pitching reverse mortgages on TV, don’t believe everything you hear. Many of these ads are misleading and don’t always give you the whole story. In fact, the Consumer Financial Protection Bureau recently issued a warning to seniors to watch out for these deceptive advertisements. With that said, here’s the lowdown on reverse mortgages.
A reverse mortgage is a unique type of loan that allows older homeowners to borrow money against the equity in their house that doesn’t have to be repaid until the homeowner dies, sells the house or moves out for at least 12 months. At that point, you or your heirs will have to pay back the loan plus accrued interest and fees, but you will never owe more than the value of the house.
It’s also important to understand that with a reverse mortgage, you, not the bank, own the house, so you’re still required to pay your property taxes and homeowners insurance. Not paying them can result in foreclosure.
To be eligible, you must be at least 62 years old, own your own home (or owe only a small balance) and currently be living there.
You will also need to undergo a financial assessment to determine whether you can afford to continue paying your property taxes and insurance. Depending on your financial situation, you may be required to put part of your loan into an escrow account to pay future bills. If the financial assessment finds that you cannot pay your insurance and taxes and have enough cash left to live on, you’ll be denied.
Around 95 percent of all reverse mortgages offered today are Home Equity Conversion Mortgages (HECM), which are FHA insured and offered through private mortgage lenders and banks. HECM’s also have home value limits that vary by county, but cannot exceed $625,500.
How much you can actually get through a reverse mortgage depends on your age, your home’s value and the prevailing interest rates. Generally, the older you are, the more your house is worth, and the lower the interest rates are, the more you can borrow. A 70-year-old, for example, with a home worth $250,000 could borrow around $136,000 with a fixed-rate HECM. To estimate how much you can borrow, use the reverse mortgage calculator at reversemortgage.org.
You also need to know that reverse mortgages are expensive with a number of fees, including: a 2 percent lender origination fee for the first $200,000 of the home’s value and 1 percent of the remaining value, with a cap of $6,000; a 0.5 percent upfront mortgage insurance premium (MIP) fee, plus an annual MIP fee that’s equal to 1.25 percent of the outstanding loan balance; along with an appraisal fee, closing costs and other miscellaneous expenses. Most fees can be deducted from the loan amount to reduce your out-of-pocket cost at closing.
To receive your money, you can opt for a lump sum, a line of credit, regular monthly checks or a combination of these. But in most cases, you cannot withdraw more than 60 percent of the loan during the first year. If you do, your upfront MIP fee will be bumped up to 2.5 percent.
To learn more, read the National Council on Aging’s online booklet “Use Your Home to Stay at Home,” which you can download at homeequityadvisor.org.
Also note that because reverse mortgages are complex loans, all borrowers are required to get face-to-face or telephone counseling through a HUD approved independent counseling agency before taking one out. Most agencies charge around $125 to $250. To locate one near you, visit go.usa.gov/v2H, or call 800-569-4287.
Jim Miller is a contributor to the NBC Today show and author of “The Savvy Senior” book.