Stay in Your Home

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mortgage cartoonA recent article in the Wall Street Journal says upfront fees on reverse mortgages have fallen substantially in recent months. This is an important development since, in the past, reverse mortgages have faced criticism for charging high upfront costs.

A reverse mortgage allows older homeowners to tap their home’s equity and remain in the house. The amount available to the homeowner depends on a number of variables, including the homeowner’s age and the home’s appraised value. Payments to the borrower can be made in a lump sum or in regular installments, or a home-equity line of credit can be established, according to the Department of Housing and Urban Development’s (HUD) website. The loan typically doesn’t come due until the homeowner sells the house or dies.

Reverse mortgages are available to homeowners who are 62 years old or older and own their homes outright or have a substantial amount of home equity. The vast majority of reverse mortgages are insured by the Federal Housing Administration, through the Home Equity Conversion Mortgage (HECM) program.

The article states that reduced upfront fees on reverse mortgages are a result of investor demand for securities backed by those mortgages. These securities are backed by Ginnie Mae, based on reverse mortgages insured by the FHA. That combination results in a very secure investment and investors are willing to pay a premium for that kind of safety with an attractive yield. Lenders are essentially passing on some of that premium to borrowers in the form of lower fees.
Prospective borrowers need to get the full details of the offer from the lender, and compare them carefully. One lender might reduce the origination fee. Another might waive the origination fee but raise the interest rate. Another could change the servicing fee. Counseling, which is required to qualify for the FHA HECM program, can help borrowers sort through their options.

With declining home values, people might be less inclined to take out a reverse mortgage these days because the equity in their home has taken a hit, but it’s important to note that those who took out a reverse mortgage when home prices were at a peak won’t face changes to that loan – even if their home value has fallen substantially. The amount owed will never exceed the value of the home, because of the FHA insurance.

A reverse mortgage isn’t right for everyone. It probably makes the most sense for people planning on staying in their homes for more than a few years. On top of the mandatory counseling for an FHA-insured reverse mortgage, it might be a good idea to speak to a HUD-approved HECM reverse-mortgage counselor at hud.gov.

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