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Reverse Mortgage Rules

By Terry Savage on September 23, 2019

If you’re a senior looking for more income, you may have to look no farther than your own home. A reverse mortgage could be the perfect solution to the need for more income — if you plan to stay in your home for at least 10 years. You can withdraw either a lump sum or monthly payments — tax free — out of the equity you have built up on your home. And you can never run out of money or be forced out of your home because of those withdrawals.

The standard home-equity conversion mortgage (HECM) is available to homeowners age 62 or older who have either paid off their mortgage or have a small remaining balance. The amount you can receive is determined by your age, the value of your home and current interest rates.

You don’t need a credit check to qualify, and you retain title to your home. You won’t have any mortgage payments, although you will be responsible for homeowner’s insurance, property taxes and upkeep on your home. But you’ll now have a monthly check to pay for those expenses, or a pool of money in the bank to cover emergencies.

Basically, you are just borrowing from yourself, although you will be paying interest on that loan. But the interest is added to the amount of equity taken out of the home. When you sell the home and move, or die, the amount you have borrowed out of your home’s equity, plus interest and fees accrued, must be repaid from the sale proceeds.

Most important, you — or your heirs — can never owe more than the home is worth. If the amount borrowed through the reverse mortgage is greater than the value of your home, you or your estate are not liable to make up the difference.

The HECM carries federal insurance that protects the lender in case you outlive your projected life expectancy and withdraw more than the home is eventually worth at your death. The maximum amount of equity that is considered for a HECM reverse mortgage is currently $726,525, although that limit is likely to increase in future years.

For those who have more expensive homes, there is a growing market for proprietary reverse mortgages offering larger withdrawal sums, and for properties ineligible for FHA financing. Now the government is allowing exceptions to the rule that the entire building must be FHA eligible, so condominium owners can access reverse mortgages more easily.

An HECM lender will conduct a financial assessment to ensure the borrower has the financial means to continue paying property taxes, homeowner’s insurance, association dues and other property charges. And independent counseling is required by a HUD-approved agency to make sure the borrower understands his or her responsibilities.

Since there are fees associated with taking out a reverse mortgage, this works best for those planning to stay in their homes for a few years. In addition to the third-party closing costs typical of all mortgages, you’ll pay an upfront 2% mortgage insurance premium and an ongoing monthly insurance premium of 0.5% of the outstanding loan balance. There is also an origination fee, capped at $6,000. But the one aspect of HECMs on which lenders do compete is in origination fees, so be sure to compare. All those fees are added to your loan balance, which is why you should start the process only if you have a long enough time horizon in your home to make the costs worthwhile.

To find out how large a lump sum or the size of a guaranteed monthly check you could get through a reverse mortgage, go to ReverseMortgage.org, and use the online calculator. This site also has a search function to find reverse mortgage lenders in your area.

If you, or your parents, truly plan (hope) to stay in your home for years and have the financial resources to maintain it, you owe it to yourself to investigate a reverse mortgage. And that’s The Savage Truth.

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