A Built-In Portfolio NeutralizerĪlthough most people think of reverse mortgages as a standalone loan, it's time to consider them differently, says Jack Guttentag, a professor emeritus of finance at the University of Pennsylvania's Wharton School. Only the lump sum option qualifies for a fixed interest rate. The reverse mortgages themselves can be paid out in four different ways: a lump sum when the loan is taken out tenure, which is equal monthly payments as long as at least one borrower lives and continues to use the home as a main residence term, which consists of equal monthly payments over a fixed period or a line of credit, also known as a standby mortgage, that can be used until the money is gone. For example, fees and the required mortgage insurance are about $25,000 for an $800,000 house, according to Pfau. Reverse mortgage fees, which are usually rolled into the loan, can be high. Irwin notes that about 40% of potential applicants who go through counseling to take out the loans decide not to proceed. Retirees, Make the Most of Your Home Equity "If people are taking out a product and don't understand it, that's a problem." Nevertheless, some people still don't know what a reverse mortgage is, says Cora Hume, a lawyer in the Office for Older Americans in the Consumer Financial Protection Bureau. According to HUD, 49,207 HECMs were taken out in 2021. The number of reverse mortgage defaults have fallen to about 1.5% in 2019, compared with between 3.6% and 5% before 2014, says Irwin. The reverse mortgage is paid off when the nonborrowing spouse dies or moves out of the home. HUD made it easier for an eligible nonborrowing spouse to stay in the house, although the reverse mortgage payments cease. Before 2014, the nonborrowing spouse could be evicted from the home or required to repay the reverse mortgage loan if the borrowing spouse died or moved into assisted living. One important provision that HUD addressed pertains to spouses who aren't named on the reverse mortgage. Although other debts are considered, there is no debt-to-income ratio requirement. The amount you can borrow depends on your age (with older homeowners typically receiving more) and your house value, the amount of equity in it and interest rates. HUD also mandates a financial assessment of the borrower's sources of income, including Social Security, pensions and investments. The agency now requires that borrowers receive counseling at HUD-approved sites before closing on an HECM and limits how much a borrower can draw at closing or in the loan's first year. Should You Rent or Buy Your Next Home in Retirement?īut other pitfalls exist, some of which HUD has addressed. Mortgage insurance, which FHA requires borrowers to have, protects the lender if the home's value falls. Because a reverse mortgage is considered a nonrecourse loan, you or your heirs can't owe more than the home's fair-market value. The lender takes over a house when the borrower dies or moves out for more than a year, but heirs are entitled to any leftover home equity and can even use it to pay off the reverse mortgage and reclaim the house. Typically, private reverse mortgages are more appropriate for someone younger than 62 who has a high-dollar-value house or lives in a condominium. Besides HECMs, a small number of private reverse mortgages are available in some states through specific lenders. In 2021, the average age of an HECM borrower was 73 years old, with the average home value $415,000, according to Steve Irwin, president of the National Reverse Mortgage Lenders Association. Typically, you must have at least 50% equity in the home, which must be your principal residence. You must be age 62 or older, and as of 2022, the loan can't be based on a home value greater than $970,800, even if the house is worth more. Federally insured HECMs have strict requirements.
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