The reverse mortgage is sometimes termed "expensive". Yet, when you ask seniors who have opened a reverse mortgage, they often share a contrasting and more interesting take. Many will tell you that they felt that the benefits actually outweighed the monetary cost of the reverse mortgage. Some have even found that their financial or lifestyle benefits far exceeded the costs included in the reverse mortgage.
So, what makes the reverse mortgage so unique or controversial? The FHA reverse mortgage allows homeowners age 62 and older to use a portion of their equity to eliminate existing mortgage payments, or receive monthly and/or lump sum payments. The FHA insured reverse mortgage is also known as the Home Equity Conversion Mortgage (HECM). The HECM also allows seniors to BUY a principal home with a down payment from 10-50% (based on age) with NO monthly mortgage payment. The older the senior, the lower the down payment. In Dayton, Ohio, reverse mortgage specialists are discovering the new reverse mortgage for purchase to be very popular.
Most seniors grow weary of home maintenance and walking up and down stairs. They want a more manageable home and one that they own without a monthly payment. Typically, and understandably, this leads seniors to believe that they can't afford a new higher priced home that might be a more ideal retirement choice (i.e. condo or ranch).
For instance, both Bob and Ann are 72, healthy and have a sale pending on their home. They expect to net $125,000 from their sale and are looking at several newer condominiums listed for $170,000 -$180,000. The developments are laced with mature trees surrounding a large private pond, the development is near a beautiful golf course, and most of the owners are retired. If they buy a condo using the FHA reverse mortgage for purchase (HECM) they will only need about $90,000 and they will have NO monthly payment...for as long as they live in the home. It gets even better. Bob and Ann expect to net $125K from their sale but will only need $90K, this will leave $30,000 more in liquid assets, nearly $88,000 in equity and they will own a newer home that meets their needs AND wants! Plus, when property appreciates their higher value home will produce a higher annual increase than if they had bought a $125,000 home.
The FHA reverse mortgage for purchase or refinance will run 1-3% more in fees than a traditional FHA mortgage, but these costs are financed on a refinance. The interest rates, however, are very competitive and are currently at 5.49% fixed and 2.75% adjustable through the nations largest reverse mortgage lender.
FHA loans are insured which means that if something happens to the originating lender, the borrower, or the property...the borrower paid insurance fund (MIP) is used to marginalize risk and protect the viability of the program. The up-front MIP (mortgage insurance premium) of 2% is added onto every reverse mortgage. This premium fee is included in the transaction costs, along with a FHA regulated origination fee. The origination fee is not an arbitrary figure assessed by a lender, it is a product of a precise calculation established by the Housing and Economic Recovery Act of 2008 (refer to HUD mortgagee letter 2008-34). The government also allocates appropriate funding (budgets) to the program as needed. However, through 2008 the program has always operated at a surplus.
It is much easier for seniors to qualify for the reverse mortgage for purchase or refinance, they typically qualify without credit or income requirements. However, the assets to be used on the reverse mortgage for purchase must be documented. Property taxes and homeowners insurance also must be paid by the homeowner. It is important to note that such costs should be paid by all homeowners regardless of whether or not a mortgage exists. County authorities can foreclose for delinquent taxes and a dwelling destroyed by fire might not be affordably replaced without proper insurance protection.
In summary, focusing only on the "higher cost" aspect of the reverse mortgage will prevent appropriate and thoughtful consideration of a myriad of potential benefits. Reverse mortgages have improved the lives of Hundreds of Thousands of seniors throughout our nation. Know that the cost-benefit relationship in every transaction will vary from child to child, from adult to adult, and from homeowner to homeowner. You do the research, determine what you "want", evaluate what's best for you today and tomorrow based upon inflation, family needs, health, etc. and then do the math...if that's what is most important. You just might find that the best decision for YOU is a HECM refinance, or FHA reverse mortgage for purchase.
Published author with nearly two decades of lending experience. Former Assistant Vice President for the largest RETAIL Mortgage Lender in the nation. Click here to see a brief video on the >>> FHA REVERSE MORTGAGE for PURCHASE
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