More Seniors Are Taking Out New Home Loans
Many retirees no longer see paying off their home as part of their goals.
More and more Americans are taking advantage of the low interest rates and tax breaks that come with having a mortgage.
If youre sizing down, you might get a mortgage instead of buying the new place with cash. Or you might refinance for lower payments rather than paying off a chunk of your balance.
Luckily, there are plenty of home loan options for seniors today, even if youre on Social Security income. Heres what to know.
In this article
What Fees Can My Lender Charge Me
With respect to reverse mortgages under New Yorks Real Property Law sections 280, or 280-a, lenders may only charge those fees authorized by the Department in Part 79.8. All costs and fees must be fully disclosed and reasonably related to the services provided to or performed on behalf of the consumer. Specifically, a lender may charge the following fees, among others, in association with a reverse mortgage loan:
- An application fee
How Much Can I Receive From A Reverse Mortgage
The amount of money you can receive from a reverse mortgage depends on a few factors:
- your age
- home value
- current interest rates and fees.
Your age plays a large role, because the older you are the more money you will qualify when you take out the reverse mortgage.
The amount of money is based on principal limit factors, which provide you with more money as you get older.
For example, if youre a homeowner who owns your home, check out the examples below.
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What Can Hecm Funds Be Used For
The funds from an HECM loan must first be used to pay back any money borrowed against the house. After that, the money can be used however the homeowner chooses.
For example, reverse mortgages can be used to pay for long-term care expenses, such as:
- Home care services, including help with meal preparation, housekeeping, and activities of daily living
- Assisted living, memory care, or nursing home care for a spouse or parent
- Out-of-pocket medical expenses, such as hearing aids
- Home safety modifications to help with aging in place, such as a wheelchair ramp or walk-in shower
- Adult day care services or respite care
Reverse Mortgage Options For Younger Spouses
Many homeowners want to know, what are the options for couples when one spouse is younger than 62? When facing financial hardship, it is tough to simply hear that you dont qualify for the reverse mortgage. It may be helpful to discuss the options with a financial planner specializing in planning for retirement and working with aging clients and/or with a HUD approved reverse mortgage counselor.
Take Cash Out With a Traditional Refinance
Homeowners who are too young to qualify for a reverse mortgage may find they can be approved for a traditional refinance. Though there is no minimum age requirement, qualification will be based on other criteria such as credit history and income requirements. Social security, IRA or pension distributions, and other retirement income can often be used to qualify for a traditional mortgage, though it must be documented, and sufficient to show that the borrowers will be able to repay the loan as agreed.
A cash out refinance can be used to access some of the equity in the home in a lump sum. Unlike with a reverse mortgage, with a traditional refinance monthly payments will be required soon after closing and for the duration of the loan term. It can take careful planning to ensure that the sum borrowed is enough to make these monthly payments as well as help cover day to day expenses until the homeowners are no longer living, or are ready to sell the property.
Alpha Mortgage does offer traditional refinancing solutions as well.
Take Out a HELOC
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How Can You Receive Your Money
There are several options for how you can receive your money if you qualify. You can access all of the money you qualify for at time of closing, in one lump sum. Or, if you prefer, you can take some of the money at time of closing and set aside the rest. The money that you have set aside is yours to access whenever you wish. All you have to do is call us up to request your money at any time!
If you would prefer to have regular deposits delivered straight to your bank account â say on a monthly or quarterly basis â that is also an option!
If you would like to learn more about your reverse mortgage estimate, please contact one of our Reverse Mortgage consultants at . If you would like more information about the CHIP Reverse Mortgage interest rates, click here.
You Have Medical Bills
Seniors plagued with health issues may obtain reverse mortgages as a way to raise cash for medical bills. However, they must be healthy enough to continue dwelling within the home. If an individual’s health declines to the point where they must relocate to a treatment facility, the loan must be repaid in full, as the home no longer qualifies as the borrower’s primary residence.
Moving into a nursing home or an assisted living facility for more than 12 consecutive months is considered a permanent move under reverse mortgage regulations. For this reason, borrowers are required to certify in writing each year that they still live in the home they’re borrowing against, in order to avoid foreclosure.
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How Age Impacts Reverse Mortgage Loan Size
Your age is the primary factor when determining how much you can borrow on a reverse mortgage. The older you are, the higher the amount you receive.
|Age of Borrower|
*Principal Limit Factors taken from HUD.gov using example expected rate of 3.76%. You must deduct closing costs and upfront insurance to arrive at your NET principal limit.PLF tables source: https://www.hud.gov/sites/documents/august2017plftables.xls
How Does Your Payment Method Determine How Much Youll Get Paid
On the surface, it doesnt seem like the payment method would affect how much you can get. However, getting paid out in one lump sum versus monthly payments could affect the principal amount of your loan. Keep reading to understand why.
Getting the entirety of your reverse mortgage amount all at once means you could be giving up some money in the future, whereas both the fixed monthly payment option and the line of credit option could pay out more to you over time if your home value goes up.
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How You Can Use A Reverse Mortgage
Reverse mortgages give you the flexibility to use your home equity in a number of different ways. With a Home Equity Conversion Mortgage you can:
- Pay off your current mortgage and other expenses to reduce your monthly expenses
- Remodel your home to accommodate changing health and age limitations
- Keep a line of credit for unexpected expenses and financial emergencies
- Pay for health insurance until youre eligible for Medicare coverage or Social Security income
- Supplement your retirement income
- Pay for long term care and health needs
- Pay for transportation if youre unable to drive
- Pay for a child or grandchilds college or professional education
How Much A Reverse Mortgage Can Cost
Costs associated with a reverse mortgage may include:
- a higher interest rate than for a traditional mortgage
- a home appraisal fee
- a prepayment penalty if you pay off your reverse mortgage before it is due
- legal fees for closing costs or independent legal advice
The costs will vary depending on your lender. Some fees may be added to the balance of your loan. You may have to pay for others up front.
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Downside Of A Reverse Mortgage
Although a reverse mortgage can be a useful option for some homeowners, there are some negatives. Unlike a regular mortgage, where the interest and principal are paid down each month, a reverse mortgage grows each month as interest is added. If the home must be sold, the reverse mortgage must be paid back within one year.
If a homeowner doesnt make insurance and property tax payments on time, a reverse mortgage is considered to be in default and foreclosure on the home could follow. Even if payments are made on time, the home may need to be sold after the homeowner passes away to pay back the reverse mortgage. This could be inconvenient if family members are still living in the home.
What Types Of Mortgages Can Older Borrowers Get
Most mortgages that accept older borrowers come with fixed interest rates, and many offer rates that track the Bank of England base rate.
How to get a mortgage if you are an older borrowers
Use our comparisons to find mortgages that may accept you if you are over 50 or over 60
Check the maximum age you can be when you apply, which is shown for each mortgage in our comparisons
Speak to a mortgage broker because some mortgages for older borrowers are only available through them, and they will look at your finances to find you a suitable deal
Look for specialist mortgages offered by lenders aimed at older borrowers, which you can usually find through mortgage brokers
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What Are The Pros Of A Reverse Mortgage
There are many advantages of taking out a reverse mortgage:
- You dont have to make any regular mortgage payments
- You dont have to prove your income in order to qualify
- The money you borrow is tax-free and does not affect your Old-Age Security or Guaranteed Income Supplement
- You can decide how you want to receive the money you can take it as a lump sum, a regular payment, or a combination of the two
- The money can be spent on whatever you want
- You get to maintain ownership of your property
- You dont have to pay back the loan or interest costs until you sell the home or pass away
How Much Can I Get On A Reverse Mortgage
For example: Abraham is 70 years old, and he owns a home valued at $300,000. He owns her home outright, which means he has 100% equity and no current mortgage or line of credit against the house. So hed be eligible for a lump sum of $110,254 more than 55% of his homes value.
If he has a $90,000 mortgage on his home, he has 55% equity built up in his home and is eligible for a lump sum of $20,254.
If Abraham owes $150,000 on his mortgage, he has 25% equity in his home. So he would not qualify for a reverse mortgage.
Rules and equity requirements vary from lender to lender in case of a proprietary non-HECM reverse mortgage. Make sure you check with your lender to determine their specific requirements. However, if you have less than 50% equity, getting a reverse mortgage, FHA or non-FHA, can be challenging.
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Of Equity Payout Matters
The amount you can borrow also depends on the way you choose to take your reverse mortgage proceeds. HUD discourages homeowners from taking their proceeds in a single lump sum by limiting the amount you can take out in the first year of the loan term. Why? A significant number of borrowers in the past used up all of their home equity at the outset. When they needed money later, they found no remaining equity in their homes and ended up in foreclosure.
As a result, in 2013 HUD changed its rules to prevent borrowers from damaging their financial stability by using up home equity too rapidly. Under current HUD rules, you can take out up to 60 percent of your initial principal limit in the first year of your HECM loan term, regardless of whether you’ve opted for a lump sum, line of credit or monthly payments. You can take out more only if your current mortgage balance already exceeds 60 percent of your initial principal limit. In that case, you can take out enough to pay off your mortgage plus additional cash up to 10 percent of your initial principal limit.
Is A Reverse Mortgage The Best Way For My Family To Finance Long
Maybe. Reverse mortgages have become a sought-after option as the pandemic has impacted many seniors retirement savings, says Jennifer Fraser, director of stakeholder engagement at GreenPath Financial Wellness, a HUD-approved nonprofit financial counseling group. Reasons for obtaining a reverse mortgage still vary. Education is key. Its important to review all financial options to determine which is best for the borrowers specific situation and finances. One opportunity doesnt always fit all.
A reverse mortgage could be the right financial solution for you and your family. But since the decision can be a complex one, HUD requires everyone to meet with an independent financial counselor before applying for a HECM.
Some borrowers fail to grasp that a reverse mortgage is an option to age in place. They must maintain the home as their primary residence and maintain communication with the lender and complete all requests, so they dont inadvertently default, says Fraser.
A reverse mortgage may make sense to help pay for long-term care if:
A reverse mortgage may not be for everyone, says Skaggs. But it is for a lot of people who are living on fixed incomes.
A reverse mortgage may not make sense to help pay for long-term care if:
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Would You Benefit From One
A reverse mortgage might sound a lot like a home equity loan or line of credit. Indeed, similar to one of these loans, a reverse mortgage can provide a lump sum or a line of credit that you can access as needed based on how much of your home youve paid off and your homes market value. But unlike a home equity loan or line of credit, you dont need to have an income or good credit to qualify, and you wont make any loan payments while you occupy the home as your primary residence.
A reverse mortgage is the only way to access home equity without selling the home for seniors who dont want the responsibility of making a monthly loan payment or who cant qualify for a home equity loan or refinance because of limited cash flow or poor credit.
If you dont qualify for any of these loans, what options remain for using home equity to fund your retirement? You could sell and downsize, or you could sell your home to your children or grandchildren to keep it in the family, perhaps even becoming their renter if you want to continue living in the home.
When Does A Reverse Mortgage Loan Mature
With a regular mortgage, a borrower pays off the loan, month by month, and gains equity in the home with each payment. In a reverse mortgage, however, a borrower converts the equity in their home into cash. The proceeds from a reverse mortgage act as extra income for seniors who may need to pay for medical expenses or if they want to delay taking out Social Security benefits. No other payments need to be made besides property taxes, maintenance fees, and insurance payments.
Wondering how a reverse mortgage works when repayment is due?
A reverse mortgage or HECM loan will mature and become payable if the borrower fails to keep up with property taxes, repairs, and maintenance. If the borrower permanently moves out of the home or passes away, the loan will also be due. When the loan is considered payable due to the borrowers death, heirs will need to contact the lender to decide their course of action in regards to the estate.
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Reverse Mortgage Minimum Age Requirement
To become an eligible HECM borrower your age should be the age at least 55. Also, there should be equity in your home, financial resources to cover property tax, insurance, and maintenance expenses. If the spouse of a borrower is not yet 55, the older spouse can get a reverse mortgage, and the younger one can be known as an eligible non-borrowing spouse.You can access the amount from a reverse mortgage in a few different ways including a line of credit, monthly payments, a lump sum, or combination of any of the given options. Also, you can use the money in whatever way you want such as for groceries, medication, or even utility bills.
What An Equity Release Agreement Costs
It’s not a loan, so you don’t pay interest. Instead, you pay fees such as:
- an application fee
- periodic service fees, potentially deducted in advance from your home’s equity
- a fee to end the agreement
Get the fund to go through projections with you, showing the impact on your home equity over time. Get a copy of this to take away, and discuss it with your adviser. Ask questions if there’s anything you’re not sure about.
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What Types Of Payment Options Are Available
A reverse mortgage allows you to receive funds in three different ways, says Skaggs. You can choose to receive:
- Monthly payments
- A lump sum
- A line of credit
The benefit of a line of credit is that it doesnt accrue interest unless you withdraw or use the money, unlike a lump sum or monthly payments. You may also be able to use a combination of payout options, depending on the loan.