MARQUETTE - Television commercials with actors Henry Winkler and Robert Wagner advising senior citizens about "reverse mortgages" may be familiar to viewers, but a local housing counselor said many seniors remain unaware of what those mortgages are and how they can be beneficial.
"A reverse mortgage is a type of home loan that lets anyone over 62 convert a portion of their home equity into cash," said Stuart Baker, a housing counselor at GreenPath Debt Solutions, a non-profit, a U.S. Department of Housing and Urban Development-approved housing counseling agency in Marquette.
Baker said that unlike a regular mortgage or home equity loan, reverse mortgages do not require a monthly payment. In fact, repayment is not required unless the borrowers no longer use the home as their primary residence, fail to pay their property taxes, homeowners insurance or keep the house in good repair.
"One of the biggest misconceptions I run into is that people think they're giving their house to the bank, which is simply not true," Baker said. "The amount borrowed, plus interest, does have to be paid back at some point, usually when the house is sold or after the borrower passes away."
Baker said there are different types of reverse mortgages.
Single purpose reverse mortgages are offered by some state and local government agencies but aren't available everywhere.
They generally are the least expensive but can only be used for limited purposes like paying for home repairs, improvements or property taxes, Baker said.
Federally-insured reverse mortgages, known as Home Equity Conversion Mortgages, or HECMs, are backed by the U.S. government via HUD and the Federal Housing Administration. Conversion mortgages are usually more expensive than single-purpose reverse mortgages, but can be used for any purpose and have no income or medical requirements, Baker said.
Proprietary reverse mortgages are private loans that are backed by the companies that develop them.
To be eligible for an FHA HECM, the homeowner must be 62 or older, live in the house as the primary residence and owe nothing, or a small enough balance on existing loans that can be paid off with proceeds from the HECM at closing. The amount depends on their age, the appraised value of the home and the initial interest rate on the loan, Baker said.
"Generally, the older you are, the higher the home value and the lower the interest rate, the more money you'll get," Baker said.
To apply for a HECM, HUD requires that homeowners go through a counseling session with an independent government approved housing counseling agency. The cost of these services can vary from very little to up to $125.
"At this time, GreenPath has grant funding from HUD to provide the counseling free-of-charge," Baker said.
Baker said there are several different ways to receive funds from a HECM:
- Term options pay a fixed monthly amount for a specific length of time
- Tenure options pay a fixed amount for as long as you live in the home
- Line-of-credit options let you draw down the loan proceeds over time up to the limit the lender sets
- Lump sum options pay you the entire proceeds all at once.
- Homeowners also have the option to combine the term or tenure options with a partial lump sum or line of credit option.
"How you take the money depends on how you need to use it," Baker said. "If a homeowner needs a small amount, the line of credit option might be best. That way you won't accrue interest on money you don't need to spend right away."
Reverse mortgages aren't without their critics.
The money borrowed on a reverse mortgage is not free. The borrower will pay that amount plus interest. Since no monthly payments are made, the loan balance grows and interest compounds, meaning there will be less equity remaining in the house and less to leave behind to any heirs, Baker said. Also, the cost of a reverse mortgage are more expensive than traditional mortgages.
"Even if you're not sure you want to get a reverse mortgage, the best thing to do is talk to a housing counselor to get the correction information with no obligation," Baker said.
Information on reverse mortgage lenders and counseling agencies can be found by contacting HUD at 1-800-CALL-FHA or online at www.HUD.gov.
John Pepin can be reached at 906-228-2500, ext. 206.