How Does A Reverse Mortgage Work?

Q: I am retired. I've lived in my current home for 17 years, but want to downsize into a smaller, less expensive home. A friend told me that a reverse mortgage can be used to help me buy a new home. How would that work? A: A reverse mortgage called the Home Equity Conversion Mortgage can be used to borrow against your current home's equity to buy or make a down payment on another primary home. How much you can borrow varies, depending on your age, the value of your home and interest rates. You will, of course, have to make up any difference between the proceeds of this mortgage and the sales price and closing costs of the home you want to buy. But if these costs are less than the proceeds, you pocket the difference. HECMs are insured by the Federal Housing Administration. The loan requires that you pay a mortgage insurance premium that's the lesser of 2% of your home's value or the HECM mortgage limit for your area, as well as a monthly fee that's .5% of your mortgage balance. (A new option called the "HECM Saver" introduced this week lowers the upfront fee but raises the monthly fee for borrowers who are willing to receive 10% to 18% less than they would under a standard HECM.) But that fee protects your heirs, as I'll explain later. HECMs have an advantage over many other types of purchase loans in that borrowers at all income levels qualify. But there are some caveats: You must be at least 62 years old; occupy your current home as a principal residence and either own a home free-and-clear or have only a small remaining mortgage balance. You can't be delinquent on any federal loan, and you must agree to speak with a HECM counselor. If you meet these qualifications, your house will be appraised by the lender. The total amount you'll be able to borrow will be limited to the lower of its appraised value, or the program's mortgage limit of $625,500. You'll then pay an origination fee that varies depending on the appraised value of the home, but won't exceed $6,000, plus customary closing costs, which includes the cost of the appraisal. These costs can be rolled into your loan (although this will reduce the amount of the HECM proceeds available to you), or they can be added to your cash down payment. Then you sell your old home and move into your new one. You will not have to make any more house payments on your new home as long as it remains your primary residence. When you eventually move or die, the home is sold and the lender collects the principal and interest you owe. If the house sells for more than is owed, your heirs get the difference. However, if the home sells for less than the amount owed, the mortgage insurance premium you paid guarantees that the FHA will pay the difference, so your heirs aren't stuck with a big bill. Article by JUNE FLETCHER Courtesy of WSJ