With jobs, the stock market, and home values dropping at alarming rates, more elderly retirees need to supplement their cash flows. For a 70-year-old with enough equity in his home, the only viable source may be a reverse mortgage home loan. Not only are proceeds from such a loan tax-free, they may also be used for other purposes such as health care, home remodelling, making large purchases, paying off debts, buying a new home, and even vacation and travel.
- Skill level:
- Moderately Easy
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Things you need
- Title to your home
- Proof of being 62 or above
- Appraisal of property
- Statement of balance owed on home
- Application form and fee
Estimate how much equity you have on your home based on estimated present valuations. Use the online calculator from the American Association of Retired Persons (AARP) website to estimate how much you can borrow (find a link in the References section). Against this, estimate what you need or want and the manner in which you want it to be paid: lump sum, monthly instalments, a combination of both, or through a credit line.
Contact the Housing Counseling clearinghouse of HUD at 1-800-569-4287 to receive consumer information, including the name and telephone number of a HUD-approved counselling agency and a list of FHA-approved lenders within your area.
With information from the counselling service and from a lender, determine whether a reverse mortgage really best suits your needs, as against a home equity loan or credit line. Reverse mortgages are more expensive but have less stringent qualifying standards; no monthly payments are needed and the owner can remain in the house for life even if the loan accrues beyond the property's value. A home equity loan or line needs sufficient income for loan repayment, which most 70-years-olds do not have.
Canvass for and choose a lender. The two major types are the FHA-insured Home Equity Conversion Mortgage (HECM) and the Home Keeper Mortgage offered by Fannie Mae through approved lenders. Ask the lender about all the possibilities you can think of, including expenses, terms, and conditions, such as having to live in the home and the types of dwellings that qualify.
Apply, then pay all the fees including closing, appraisal, servicing and upfront premiums on a mortgage insurance policy. If the home has an existing mortgage, it has to be paid off before or when the reverse mortgage is approved and released.
Tips and warnings
- The older the applicant, the more convenient the process and the higher the loan amount. You can borrow as much as £406,250 if you live in a high housing cost area. The county you live in is also a determinant of how much you can borrow and so is the loan program you choose and the option of how you get the funds.
- Flexibilities include: using a reverse mortgage to pay property taxes yearly through a Property Tax Deferral Loan (PTD) offered by state and local government agencies; and, changing the methods of getting cash from monthly to a bigger amount in case you need a large payment for, say, roof replacement.
- Beware of false experts in reverse mortgages who are actually scammers preying on the elderly.
- Since your debts accumulate on a reverse mortgage, your equity falls unless values of homes appreciate faster.
- Reverse mortgages are not for short-term borrowers who plan to move out in a year or two.
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