We’ve all seen the television ads with the concerned-looking paid “celebrity” spokesperson who so sincerely tells the viewer that they can easily access the equity in their homes to pay for costs associated with their retirement—such as healthcare, day-to-day expenses, travel, etc. Often, these advertisements don’t identify the associated ramifications of reverse mortgages.
There are three main types of reverse mortgages; however, approximately 90% of them are Home Equity Conversion Mortgages (HECMs). These loans are guaranteed by the Federal Housing Administration and the U.S. Department of Housing and Urban Development Loans.
HECM loans can be paid out in a lump-sum, monthly installment, using a line of credit or any combination of these payment methods.
It’s important to know that there are upfront costs associated with these loans, such as appraisal and inspection fees, loan origination fee, title insurance, and other traditional closing costs in addition to a 2% fee of the home’s value as an up-front payment. All of this is in addition to interest rates that are generally higher than standard mortgage or home-equity loan rates (with insurance rates built in to insure against lender bankruptcy). Equally important, is that the interest compounds on the total HECM balance, which already includes interest.
Immediate repayment is triggered when the loan holder:
- Discontinues living in the home as their principal residence (or is away from the home for a period of twelve months)
- Transfers ownership of the home, or
- Defaults on the loan agreement
A loan default can be the result of failure to pay property taxes or homeowners’ insurance. Additionally, it can be caused by not maintaining the property or making home repairs to the satisfaction of the lender. This may result in the unintentional escalation of selling the homeowner's property.
Prior to applying for this type of loan, you may need to seriously evaluate if staying in your home is actually the best strategy and, at the least, you may want to consider these types of loans as a “last resort” type of financing after factoring in all costs and other alternatives.
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