What Is a Reverse Mortgage, and How Might It Change in 2013?
Many Americans begin to worry about money as they approach retirement age, wondering if they've saved enough over the years. If this sounds like you, and you're 62 years of age or older, there is a program where you can receive additional income just for being a homeowner.
It's called a reverse mortgage, and if you're not familiar with it, this type of loan allows you to borrow money against equity you’ve built up in your home.
But changes to the system could be coming in the New Year – including limitations on who qualifies for this type of loan, and how much you're actually allowed to borrow.
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But before we discuss those potential changes, let's go over how the reverse mortgage process works right now.
If you take out a reverse mortgage loan, your lender will give you money based on a percentage of the equity in your home. You can choose to receive a lump sum, a tenure payment, or a line of credit, and you don't have to pay it back as long as you live in your home.
Instead of a monthly payment, the loan is repaid to the lender when you die, sell your home, or when the home is no longer your primary residence (like, for example, if you move into a nursing home).
The program is run by the Department of Housing and Urban Development, and the loans are insured by the Federal Housing Administration (FHA). The FHA not only guarantees the loans, but also that you will never owe more than your home is worth whenever you go to sell it.
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There are three types of reverse mortgage available – a standard loan, a Home Equity Conversion Mortgage (HECM) Saver loan, and HECM for Purchase loan.
The HECM Saver is similar to the standard loan. The only difference is that it allows borrowers to take out a much smaller percentage of home equity than the standard loan , with much lower upfront costs.
The HECM for Purchase loan is specifically designed for individuals who want to purchase a new home, and receive a reverse mortgage, all in a single transaction.
All three types of loans require that the borrower/homeowner pay an upfront mortgage insurance premium, as well as an annual premium.
As of now, reverse mortgages do not come with income or credit qualifications, so almost any homeowner over the age of 62 can receive one, but that may change in the near future.
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So, let’s go over those changes.
During a recent audit of the FHA's finances, the federal government discovered that the agency is operating in the “red” because of the housing crisis. In other words, its net worth added up to a negative number, meaning they're in the hole financially.
In an effort to fix the problem, changes to various FHA services – including reverse mortgages – have been suggested.
While nothing is official yet, the proposed changes would make reverse mortgage loans more restrictive.
The agency is considering many options, including:
- Requiring that homeowners have a certain credit score or income level to qualify
- Reducing the amount that borrowers can receive from a reverse mortgage
- Restricting what the money can be used for
If any of these changes occur, reverse mortgages may be harder to come by, and they may not be as beneficial as they are right now.
So, if you're considering getting a reverse mortgage, now is the time to talk to your lender about it. You may want to act before it's too late!
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