Dear Carrie: I'm 68 and my husband is 73. Like many retired people, the value of our savings has gone down in the last few years. It's coming back, but we'd feel better if we could find other ways to boost our income. We've paid off our house and really want to stay here rather than downsize. What do you think about reverse mortgages? What are the risks? -- A Reader
Dear Reader: This is a timely question. Reverse mortgages have been in the news this year, for both positive and negative reasons. A new lower-cost loan introduced by the Federal Housing Authority, FHA, has made reverse mortgages accessible to a greater number of seniors -- that's the good news. But changes in the Department of Housing and Urban Development's, HUD, rules, as well as some major lenders dropping out of the reverse mortgage business, have raised concerns and hurdles for borrowers. This makes a good dose of caution extra important. I'll try to put both the pluses and minuses in perspective.
A reverse mortgage, also called a Home Equity Conversion Mortgage, HECM, is a loan that uses your home as collateral, but instead of making payments to a lender, the lender pays you. And as long as you live there, you're not obligated to pay it back. You, and your spouse, must be 62 or older and have paid off your home (or have a very low mortgage balance that can be paid off at closing with the loan proceeds). No credit check or income verification is required.
The amount you can borrow depends on a number of factors, including your age, the amount of your home equity and current interest rates. Once you have the loan, you can take the cash in a lump sum, monthly payments, a standby line of credit or a combination of all three -- and use the money however you wish.
So you and your husband could use the proceeds to augment your monthly income. The loan wouldn't have to be repaid until the house is no longer your primary residence -- if you move or pass away. Plus, the borrower never has to pay back more than the value of the home at the time of sale, even if the loan balance is more.
So far, so good, right? Not totally. There are several drawbacks; one of the major ones is cost. As part of the process, you'll pay loan origination fees, appraisal fees and a hefty upfront mortgage insurance fee of two percent of the value of your home (on a $400,000 home that's $8,000!), making this an expensive proposition. To counter this concern, last fall, the FHA introduced a new mortgage product called the HECM Saver loan, which significantly reduces upfront costs. The Saver loan doesn't let you borrow as much, but the reduced cost makes it more manageable.
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