By Chris Hopkins
Many homeowners have seen TV commercials featuring popular personalities touting the benefits of reverse mortgages. These are legitimate arrangements that allow qualifying individuals to withdraw equity from their house to be used in any manner they wish, without the obligation to make monthly payments or to repay the balance as long as they occupy the home.
The home equity conversion mortgage, or HECM, was created by the Federal Housing Authority and carries the imprimatur of the federal government. Under the HECM program, a homeowner who is at least 62 years old can access a substantial percentage of his home equity to use for living expenses, medical payments, repairs or virtually any other purpose.
Once the home is sold, the lender is repaid from the sale proceeds. Any residual value in excess of the loan amount is retained by the seller or the seller's heirs. Furthermore, no credit check or proof of income is required.
To qualify for an
HECM, the borrower must live in the house and have sufficient equity to meet the FHA guidelines. If there is an existing mortgage on the property it must be paid off first or be retired with the proceeds of the reverse mortgage. Borrowers can choose from several methods of accessing the funds: a lump sum, a line of credit that can be accessed at will, or a series of equal monthly income payments in the form of an annuity.
Suppose each spouse is 70 and that together they own a home with no debt and an appraised value of $150,000. At current interest rates the couple could choose to receive a lump sum or line of credit for $96,000, or establish a monthly income stream of $630 for life. These amounts depend upon prevailing rates as well as the age of the homeowners (older borrowers can receive larger amounts).
Reverse mortgages are relatively expensive compared to traditional home loans since the borrower must pay for private mortgage insurance, so one should be sure to investigate all other options and to shop around since lenders under the FHA program set their own fees.
Under the right circumstances these products can be a great option for older homeowners with insufficient cash flow but substantial equity value in their residences. Check out www.Hud.Gov for more information and a reverse mortgage calculator.
Get answers to financial questions on Wednesdays from our columnists who work in the financial services industry. Chris Hopkins is vice president, investments, at Barnett & Co. Inc. Submit questions to his attention by writing to Business Editor John Vass Jr., Chattanooga Times Free Press, P.O. Box 1447, Chattanooga, TN 37401-1447, or by e-mailing him at email@example.com.