When Andrew and Harriet, both in their 70’s, went to their bank to inquire about refinancing their current loan, their banker suggested a reverse mortgage and referred them to us at Reverse Mortgages SIDAC. They needed some additional funds for home repairs including a new energy efficient furnace. Anticipating future medical expenses, they liked the idea that with the reverse mortgage they could get money for their immediate needs, eliminate their mortgage payment, and still have funds for their future needs by having a line of credit.
They decided to do a reverse mortgage with the understanding that they would still own their home (as they do with their current mortgage), monthly mortgage payments aren’t required, and the interest rate is lower than they could qualify for on a regular loan (adjustable rate currently under 4%). They understand they continue to be responsible for their taxes, homeowners insurance, and maintenance of the property and don’t have to repay the loan until the home is no longer their primary residence. They liked the idea that even if one of them goes into the nursing home, the other one can stay in the home. Additionally, it was appealing that the funds are tax-free*, Social Security and Medicare are not affected and Medical Assistance and other public benefits can still be received.
A mortgage with special terms for homeowners 62 and older, a reverse mortgage has no income or credit score qualifications** (See below for Financial Assessment requirement as of April 2015.) and a low interest rate, which offers many advantages for senior homeowners. Allowing access to cash from the equity of the home to use now and pay back when the home is no longer the primary residence of borrower(s), when the home is sold any remaining equity goes to the borrower or their heirs. With the reverse mortgage, if the loan balance is higher than the home can be sold for there is no personal liability to borrowers or their heirs as long as the borrower or estate are not retaining ownership.
“When a friend told me she was doing a reverse mortgage I thought, that sounds really good. I thought, if I do a reverse mortgage, I could do some things to my home, and maybe take a vacation. After everything was explained to me and my children in detail and in words I could understand I did a reverse mortgage. I now am getting new windows and siding and am going on vacation with my daughter,” said Judy in St. Paul.
A few years ago Patricia had borrowed money from her son-in-law, Brad, to pay off a loan. Then Brad needed the money back for his own purposes. After consulting her family and an attorney, she did the reverse mortgage. She told us she was greatly relieved and the pressure was off her now that she no longer owed Brad money and wasn’t dependent on him. She added as a result of consulting the attorney, “Other good benefits are that I tended to my will being made, my health directives done, and a trust fund set up. All that is done now and I’m prepared for the future.”
The factors used to determine how much is loaned to borrowers include the home value or FHA lending limit ($625,500 through the end of 2009), the age of the borrower (the older one is the more funds they can receive), and an Expected Interest Rate. If one doesn’t have a mortgage on their home they benefit from having more funds available to them. Cash flow will improve when the current mortgage payment is eliminated if one does have a current mortgage on their home.
Even though home values may be lower at this time, it is still a good time to do a reverse mortgage because the interest rates are so low. When the home values go back up, it will mean there could be additional equity in the home. If one waits to do the reverse mortgage until home values go up, the interest may be higher and consequently less funds available.
As with a conventional loan, there are traditional closing costs including an origination fee, appraisal, title fees, title insurance and recording fees. With the FHA insured, Home Equity Conversion Mortgage (HECM) borrowers pay a mortgage insurance premium. Because the fees are up-front, they are often perceived as high. However, in the big picture the reverse mortgage may cost less because of the much lower interest rates historically available to borrowers with the adjustable rate.
“It was a blessing when we heard of reverse mortgages. We were behind in the property taxes and mortgage payments and faced foreclosure. We were really in a mess. The reverse mortgage cleared it all up and has lifted a weight from us that we can live in the house and not worry,” said Gwen and Robert.
A reverse mortgage has allowed thousands of Minnesota seniors to remain in their home with security, independence, dignity and control even during trying times. And if you know a senior who wants to sit back and relax with security, independence, dignity, and control, a reverse mortgage may be their answer.
*consult tax advisor who is familiar with reverse mortgages
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