Lowdown: What You Need to Know About Reverse Mortgages
Retirees who are strapped for cash can now tap into their home's equity for less.
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1. Age matters (income doesn't). If you are 62 or older and have paid off your mortgage (or owe only a small balance), you may be able to tap your home equity to generate extra cash. You can take the money as a lump sum, a line of credit, monthly payments, or a combination of a credit line and regular payouts. Unlike a traditional mortgage or home-equity loan, you don't need to meet income or credit requirements to qualify, and you don't have to repay the loan as long as you live in the house.
2. Lenders are motivated. Declining property values and stricter lending limits imposed by the Federal Housing Administration last year took a big bite out of the reverse-mortgage market. Now lenders are looking to gin up new business -- partly to satisfy investor demand for government-backed mortgage securities, known as Ginnie Maes, which include reverse mortgages. To attract new borrowers, some lenders are waiving loan-origination fees and other upfront charges, which could save you up to $10,000 -- and increase the amount you can borrow by the same amount.
3. It could be a stop-gap solution. Because upfront costs are lower, you may not need to remain in your home for several years to justify the cost of the loan. Say you want to sell your house, but the real estate market stinks and you need to fix it up to attract potential buyers. You could take out a reverse mortgage to finance the home improvements. You'd then pay off the reverse mortgage when you sell the house and pocket the difference. (The loan is due in full when you move out permanently -- or die.)
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4. The older you are, the better. The amount you may borrow depends on your age, your home's value and interest rates. The older you are -- and the more valuable your home (up to a maximum of $625,500) -- the more you are entitled to take. The loan calculation factors in the interest and fees that accrue over time, reducing the amount of equity you can tap. For example, if you're 65, you might be able to borrow up to half of your equity. Wait until age 85, and you could tap 70% or more.
5. Borrow sparingly. If you choose a lump sum, you must borrow the full amount that you qualify for -- close to $200,000 in the case of, say, a 65-year-old homeowner with a paid-off home worth $400,000. Interest will continue to build on the entire amount until the loan is paid off. If you don't need the full amount, select a line of credit or monthly payouts and pay interest only on the amount you use.
6. The loans still aren't cheap. If you borrow $50,000 on a $400,000 home as a line of credit, you would owe more than $16,000 in interest and mandatory insurance premiums after two years. That combined cost would double to more than $32,000 if you remained in the house five years. Use the calculator at www.goldengateway.com to estimate how much you can borrow and what it will cost.
7. Costs could be going up. Fees and interest rates are low now. But the FHA could tighten lending limits and boost insurance fees if its budget for the reverse-mortgage program is scaled back in the fiscal year that begins October 1.
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