The reverse mortgage industry has been plagued over the years by confusion, rife with reports of predatory lenders preying on the elderly. Today, reputable lending institutions require that borrowers receive counseling about the risks and pitfalls before committing to a reverse mortgage. Unfortunately, that still doesn't guarantee a homeowner won't get ripped off.
How a Reverse Mortgage Works
Reverse mortgages allow a homeowner to borrow equity. Instead of making payments to the lender, the lender makes payments to the borrower. Payments can be made as follows:
- A lump sum
- Monthly, for as long as the borrower occupies the home
- Periodic advances through a line of credit
- Combination of any of the above
Who Can Qualify for a Reverse Mortgage?
Anybody over the age of 62 who owns a home can qualify for a reverse mortgage if there is adequate equity in the home. That's the kicker, having enough equity to get the mortgage, as usually, a 20% equity position is insufficient. If there is enough equity, what happens next?
- Existing mortgage(s) will be paid off.
- Deferred maintenance/repairs will be required, if necessary.
- FICO scores do not apply and credit history is irrelevant.
How Much Do Reverse Mortgages Cost?
Like with a regular loan, borrowers pay fees to get the money. These fees can be rolled into the loan and financed. Because there are no "standard charges," the fees will vary depending on the lender, third-party vendors and the type of loan selected. Usually, the fees are very high. Basically, borrowers pay for:
- Mortgage insurance premiums. This insurance pays for a loss to the lender if your home is worth less than the amount owed at the end of your loan.
- Monthly lender fees. Lenders typically charge the borrower to disburse monthly payments.
- Loan points or application fee. This fee increases the lender's return on investment. It is these fees that are under a lot of scrutiny.
- Normal closing costs. Fees to close include charges for recording, escrow or closing agent, title policy, etc.
How Much Can You Borrow?
The amount of loan available depends on the type of loan program selected, how much equity remains after paying off existing mortgages and the borrower's age. Wells Fargo is a leading originator of reverse mortgages.
I found a handy online calculator on the Wells Fargo Web site: Wells Fargo Loan Calculator. I plugged in an age of 65 and a free and clear home worth $500,000. For an Annual Adjusting HECM (Home Equity Conversion Mortgage) the calculator returned estimated closing costs of $20,943, with a lump sum payment available of $129,614, bearing annual interest at 8.67%, which could go up as high as 13.67% over the term of the loan. The monthly payment available for this loan is $949. At age 75, however, that monthly payment jumps to $1,401.
Types of Programs Available
A handful of lenders offer fixed-rate mortgages. The bulk of other reverse mortgage programs are financed through an adjustable rate mortgage loan. The interest can adjust monthly or annually.
- Lenders charge a margin, which varies among lenders.
- The margin, when added to the index rate, will equal the interest rate.
- Interest rates are typically capped, meaning the rate can be increased to a maximum rate and no higher. Caps range from 5 to 6 percent on an annual adjusting rate and from 10 to 11 percent on a monthly adjustable rate.
The most popular type of reverse mortgage today is the Home Equity Conversion Mortgage, insured by the U. S. Department of Housing and Urban Development.
The "HomeKeeper Mortgage" is from Fannie Mae. Fannie Mae buys conventional mortgages, repackages them and sells them as securities to investors. Using the Wells Fargo Reverse Mortgage Calculator and the previous scenario, at age 65, The HomeKeeper mortgage would pay $587 per month and $1,381 at age 75.
Where Can You Get a Reverse Mortgage?
- The National Reserve Mortgage Lenders Association publishes a list, sorted by state, of approved lenders who originate reverse mortgages.
- Department of Housing and Urban Development also publishes a list of approved HUD lenders. Remember to check the box that limits the search to lenders who have completed a HECM loan within the past 12 months.