Funding of retirement is a major question for anyone who is in their sixties. With the aging of the population in US, more and more people are looking at options that will allow them to support a certain standard of living in their retirement which they have grown accustomed to. For most of the people in the baby boomer generation, a major asset they own is their primary residence and by having access to this significant asset’s equity one can drastically improve longevity of income in a seniors retirement.
Reverse mortgage is an option in which it is possible to unlock the equity of the home to receive additional retirement income. At the same time, the owners continue to reside in their home till their demise.
The major reverse mortgage program is run by Federal Housing Administration (FHA) called the Home Equity Conversion Mortgage (HECM) representing 95% of the market. However, before proceeding with the process there are several things that need to be addressed.
1. Difference: Unlike a home equity loan the owners do not have to make monthly payments on interest and principle. However, you have to make a regular payment for flood and hazard insurance, real estate taxes and utilities as you would even if there were no mortgage on the loan. The majority of defaults on the HECM loan are due to seniors underestimating these ongoing obligatory expenses. One of our partner lenders will make it extremely easy to see how much you qualify for and what
2. Primary Residence: You must reside in the same property as your principal residence. You are said to be residing in the same property if the gap in the stay is not more than one continuous year. Vacation or second home’s won’t qualify for this loan type.
3. Qualification: To qualify for this loan you must be 62 years of age or older, must own the property, or you should be able to pay off the remaining mortgage balance through the proceeds of the reverse loan. You also need to have the financial resources to pay ongoing property taxes/insurance. However, a significant advantage against home equity loans is that you do not need to have good credit score history. There are planned changes that could make credit scores and financial assessment a requirement by end of year 2014.
4. Properties covered: The FHA HECM is available to buyers who reside in 1-4 unit homes with 1 unit occupied by the person borrowing the loan. The manufactured homes and condominiums which pass the FHA requirements are also eligible
5. Estate: One major question which comes in front of all buyers of this loan is whether they will be able to give an inheritance for their successors. When a house is sold after the death of the buyer, there is an option where the heirs can pay off the loan at 95% of fair market value of the property. Else the house is sold, and the proceeds are used to pay the cash, interest and other charges by HECM, which are incurred. After payment of all if there is any remaining equity it will be transferred to the heirs. In case the amount on sale of house is less than the final amount to be paid the remaining debt is NOT passed to the estate or the heirs
6. Amount of Money: The amount of money which one can obtain depends on a couple of things:
a) What is the current interest rate?
b) What is the age of the youngest borrower (when two borrowers are listed for the loan the age of the younger person is counted which calculating payment)
c) There is a limit of $625,000 set by FHA in its HECM program. The lesser of appraised value or $625,000 set can be used.
d) Initial premium for Mortgage insurance.
Calculate the exact money which you will get at:
7. Payment Structure: The payment for the loan can be obtained in several ways:
a) Lump sum disbursement: The borrower can take a single one time lump sum payment after processing of the loan. The amount calculated will arrive according to the above given parameters. (It should be noted that the home equity is the last line of finance if a single payment is taken it would not leave any further home equity in case of future medical or other emergencies, unless the property continues to increase in value outpacing the loan at a higher interest rate.)
(Scenario: Matt Smith (64) uses reverse mortgage loan to receive $120,000 through which he repays his existing mortgage. This helps in eliminating monthly payment of interest.)
b) Line of Credit: This allows for unscheduled payments at the time of choosing and for the amount required till the credit limit is reached. If this program is used for immediate emergency, this might be a better structure as it will allow for some residual equity when needed in the future.
(Scenario: Ben and Mary Cooper (76 and 72 years respectively) have a retirement home where they are residing for the past 15 years. Ben has a mild heart attack, and they require cash to make minor adjustments in their home to make it more suitable. They apply for HECM and get $110,000 line of credit. Out of this they use $25,000 for modifications and keep the remaining credit ($85,000) for future needs.)
c) Tenure: This is one of the ideal options and ideally suited for this program. Here an equal monthly payment is done as long as at least one of the buyers is residing in the property and is using it as a principal residence. For people who have lower social security payments this can be used to shore up their finances and lead a more comfortable lifestyle.
(Scenario: Liz Jones (78) is retired and is residing in her home that is near her friends and family. She wants an extra income which she can use with her social security to have a comfortable retirement. She receives $135,000 in her HECM loan and selects a tenure plan. She will receive $925 per month till she resides in this house. This gives her peace of mind that she will not be a burden on anyone as her age advances.)
d) Term based: Equal monthly installments are made for a given fixed time.
e) Modified Tenure: This is a mixture of option b) and c). Besides getting a monthly payment, you can allot a fixed amount to creating a credit limit to be used in case of future emergency. This provides the benefit of steady income and an additional layer of protection by providing a credit option.
f) Modified Term: Here a mixture of option b) and d) is used. Besides having a line of credit, there is a fixed monthly payment of a set number of months.
Major questions to be asked before purchasing
For people who have stayed in the same home for decades there is more than just a sentimental attachment with their home. This is the place where they saw their children grow up, sharing both happy and sad moments, got shelter and security. It would not be an exaggeration if they feel their home be a part of their soul or an essential organ in their body without which they cannot survive. However, there are a couple of things that should be thought over before you take this loan.
It is beneficial if you have friends and family nearby. The national median costs of some of the services you require as you age are:
Home health aide: $19/hour
Assisted living: $3,300 per month
Nursing home: $200-$220/day
Adult day health care: $61/day(For limited time period)
Source: Genworth Financial 2012 Cost of Care Survey.
Under this loan, it would be beneficial if you plan to stay in the same home till the end. If it is not a primary residence for more than one year, the home is liable to be sold. Hence if you want to stay in the same home you need to ask yourself:
a) Maintenance: Will it suffice for my changing needs in the next 20-30 years? The cost of maintenance increases in older homes that can be a drain on your income.
b) Safety: Is it safe both indoors and outdoors? Inside there might be steep stairs, furniture, etc. Unsafe neighborhood would also be a consideration in the decision making.
c) Friends and Family: Do you have family and friends nearby? Getting stuck in a property away from near and dear ones might cause isolation and depression as you get older and yearn for greater interaction with friends.
d) Location: Finally, it is important to note if grocery, pharmacy, etc. are nearby. In case you cannot drive, it should be easy to deliver requisite materials and services to you.
In the end, it is essential to look at all the scenarios and plan accordingly. Further guidance can be obtained by talking to HECM counselor online or calling HUD at (800) 569-4287. Choose a program that suits your purpose as this is the last credit option.