A new type of reverse mortgage that could benefit some senior citizens has been approved by the Federal Housing Administration. In a traditional mortgage, you borrow money against your house and pay it back in monthly installments over time. With a reverse mortgage, you borrow money against your house, but you don’t have to pay it back until you die, sell the house, or move – which means you don’t owe anything as long as you stay in your home.
In most cases, to qualify you must be at least 62 years old. Reverse mortgages have been criticized in the past because they can involve high fees. For instance, in a traditional reverse mortgage, a borrower had to pay 2% of the loan amount as mortgage insurance. On a $250,000 mortgage, that amounted to a $5,000 fee.
However, a new product called a “Saver” reverse mortgage cuts this fee almost to zero. You pay just .01%, or only $25 on a $250,000 loan.
The tradeoff is that the total amount you can borrow is less – about 10% to 18% less in most cases.
(Other fees still apply, including closing costs and an origination fee that is capped by law at $6,000. But banks have been lowering these fees, too, so it pays to shop around.)
Many older people whose savings were hurt by the recession have turned to reverse mortgages for extra liquidity. Other people planned to sell their home in retirement, but are having trouble doing so in a slower real estate market. Taking out a reverse mortgage allows them to get cash from their home without having to sell it right away.
With a reverse mortgage, you can receive your money as monthly payments for a fixed term, monthly payments for as long as you stay in the home, or a line of credit. You can also combine a line of credit with monthly payments. In some cases, you can receive a lump sum. If you have an existing mortgage, it will typically be paid off by the new loan.
Proceeds from a reverse mortgage are not subject to income tax and generally won’t affect your ability to receive Social Security or Medicare.
However, it’s possible that they could affect your eligibility for certain government programs such as Medicaid. For instance, if you have a reverse mortgage and you move to a nursing home, you have to sell your house and take whatever equity is left in it in cash. You might then have to “spend down” that money before qualifying for Medicaid payments.
Another option that can work for some seniors is a private reverse mortgage – in other words, a reverse mortgage-type loan from a family member rather than from a bank.
The advantages to a senior are that a private loan doesn’t require origination or insurance fees, there is no limit to how much of your equity you can borrow, and you don’t have to sell the house if you move to a nursing home. Also, private loans can come with a lower interest rate than bank loans (although there is a minimum interest rate set by the IRS).
A family member who makes such a loan can help out a relative while collecting regular interest that’s higher than what savings accounts and CDs typically provide. Also, if a senior is able to save money by avoiding higher interest and fees, he or she may have a larger estate to pass on to heirs.