Continued from last week, "Should you refinance your retirement with a reverse mortgage?"
Example: You are 73 years old and own outright a $200,000 home. With an HECM loan you get a line of credit or a lump sum advance. If the house is worth $300,000, you can borrow $124,000. If you are 70 years old, you can only borrow around $115,000. Always check with a specialist as things change.
As with any mortgage, the borrower must pay interest and the loan is secured by the house. But, you need not make any payments at all until you leave the house.
Then you or your estate can sell the house and pay the principal and interest. Any appreciation belongs to the homeowner or heirs. Many homeowners or heirs elect to prepay the interest and principal and keep the house. There are no prepayments or penalities. Through the process, the homeowner owns the house- not the lender.
Payments to you
Besides a lump sum, there are several other ways for you to take your cash from a reverse mortgage.
n Line of credit. You use the reverse mortgage credit line when you need it. You could use some of the money to pay routine bills and use the rest for home repairs, etc. You owe principal and interest only on the money that is actually drawn down.
n Monthly advances. Under this option, the homeowner could receive monthly payments of about $735 for as long as he/she stays in the house. If the homeowner dies after one year, the heirs need to pay only the interest and principal of payments already received.
n Fixed period. Instead of electing income for your life in the house, you can elect to receive monthly checks for a fixed period, such as five years. This could help you survive a difficult time, for example, until pension payments start or until you sell the house and move to your retirement home.
n Combinations. You can select more than one payment option. You might choose a lump sum of $25,000 to make repairs on the house. At the same time you could receive monthly payments to cover living costs.
Paying off mortgages
About 78 percent of Americans own their homes without any debt, according to the U.S. Department of Health and Human Services. But, those with a conventional mortgage can use the reverse mortgage to pay off the debt. This relieves the pressure of paying monthly payments and also enables the homeowner to avoid foreclosure woes.
Costs: Interest rates on reverse mortgages are typically adjustable annually. The recent rate was a bit more than the average fixed-rate mortgage.
Besides, the interest, an HECM borrower must pay an origination fee equal to 2 percent of the value of the home or $2,000, whichever is greater. In addition, there is an up-front HECM mortgage insurance fee which is equal to 2 percent of the value of the home.
Most of the fees can be included in the value of the loans, so the borrower does not face sizeable out-of-pocket costs at closing. Or, the fees can be paid along with the rest of the mortgage when the house is sold.
Who should use a reverse mortgage
To determine whether it is worth paying the costs of a loan, meet with a financial planner to discuss all aspects of your situation. Under the rules, all borrowers must attend a counseling session with an independent expert. This process is worthwhile, because borrowers may decide that other alternatives are more attractive.
If you are in chronic bad health and may not be able to live in the house much longer, a reverse mortgage could be the wrong choice. In addition, a reverse mortgage could be unsuitable if the home is in bad shape. In an extreme case, the property might cost more to fix up than it is worth. From your reverse mortgage, you might get a lump sum of $100,000, but have to spend $80,000 to make the house meet your needs. There are many specialists (several, some from as far away as Tampa, e-mailed me to express their congratulations on the first article).
Just remember last weeks column about the reverse mortgage calculator at www.rmaarp.com.
Have a real estate question? Write, call, fax or e-mail:
Bob Jeffries, Realtor,
Century 21 Birchwood Realty, Inc.
4040 Del Prado Blvd., Cape Coral, FL