Posted by Denise Kovach, CFP®, AIF®
A reverse mortgage is actually called a Home Equity Conversion Mortgage (HECM) which is government backed. This program enables you to withdraw a portion of your home’s equity. It is a type of home loan that requires no monthly mortgage payments. It does require repayment, plus interest, once you either move out of the house or pass away, and you must continue paying for real estate taxes and homeowners insurance.
Here’s a few reasons why it may make sense for you:
If you do not have long term care insurance, this could be a great source of tax-free money to cover that expense should the need arise.
Do you currently have a mortgage and making monthly payments? Using a HECM to pay off the mortgage would increase your discretionary income.
Is the stock market in a downward spiral and you do not want to touch your portfolio in order to let it grow back? A HECM could provide you with the supplemental cash and time you need.
Is your income level at a point where your medicare premium costs are dramatically increased? Because a HECM provides tax-free money you are in a position to potentially reduce your taxable exposure, as well as your medicare premiums.
To qualify you must be age 62 or older, own the property outright or have paid down a considerable amount on the mortgage, occupy the property as your principal residence, have the financial resources to continue to make timely payment of ongoing property charges such as property taxes, insurance, HOA fees, etc. You will also participate in a HUD-approved consumer information session with a HUD approved counselor.
A HECM is available to you in a few ways, as long as at least one borrower lives in and continues to occupy the property as a principal residence. (Keep in mind that if no one occupies the property for 12 months, the loan must be repaid.)
– Equal monthly payments.
– Equal monthly payments for a fixed period of months.
– Line of Credit which provides for unscheduled payments at your choosing.
– A combination of a line of credit with a fixed amount.
A HECM includes several fees and charges, such as:
1) mortgage insurance premiums (initial – and annual)
2) third party charges (survey, appraisal, etc.)
3) origination fee and
4) servicing fees
You can pay for costs by financing them and having them paid from the proceeds from the reverse mortgage, but this will reduce the loan amount available to you. You can also pay for them out of your pocket.
The amount you may borrow will depend on the age of the youngest borrower, current interest rate, and the lesser of the appraised value or the HECM FHA mortgage limit of $625,500.