The Reverse Mortgage Process
So you’ve decided that remaining in your home suits your future lifestyle and that a reverse mortgage loan is a good option to tap into the equity in your home. Most likely you will be considering a reverse mortgage with a financial institution under the Home Equity Conversion Mortgage (HECM) scheme. HECM loans are insured by the Federal Housing Administration (FHA), which is a subsidiary of the U.S. Department of Housing and Urban Development (HUD).
The first stage of the process to obtain a reverse mortgage is to determine your eligibility. The FHA has the following requirements for borrowers of a HECM loan:
- At least one of the owners of the home need to be aged 62 years or over.
- You must be living in your home as a principal place of residence.
- You must not be delinquent on any federal debt.
- Your home needs to located in the US and be a single family residence, or part of a planned unit dwelling or condominium development approved by the HUD.
- You home needs to meet the minimum property standards set by the HUD.
- You need to discuss your situation, your options and the HECM program, with a counselling agency approved by the HUD.
During the initial stages it is also a good idea to get some guidance on how much money you may receive from a reverse mortgage. A reverse mortgage calculator can be found at www.aarp.org/revmort.
Once you are confident that you will comply with the eligibility requirements and you are satisfied that a reverse mortgage will lend you enough money to be valuable after the upfront costs, the next step is to discuss your situation and requirements with the lenders; the financial institutions.
At first this may seem a challenging task, as specific conditions, fees and rates on HECM loans vary from lender to lender, and even individual lenders may offer a range of packages. Like any loan, two key elements to a reverse mortgage are costs and interest rates. Costs incurred from the lender include an origination fee and a monthly service fee. Most important is the interest rate. Interest rates can be fixed, but fixed rates can be high and most often apply to lump payments. Most borrowers find that a line of credit with variable rates better suit their needs. A variable rate is usually based on an index rate and a margin. The margin is controlled by the lender and is the percentage amount added on top of the interest rate of the index.
Other costs that are not dependent on the lender include third party closing costs such as appraisal, title search, surveys, inspections, etc. There will also be upfront and monthly mortgage insurance premiums. For a HECM most of the upfront costs are regulated and there are limits on the total fees that can be charged. Upfront costs may be paid out from an advance payment on the reverse mortgage.
Due to the variability in costs and interest rates for reverse mortgages, it can be difficult to compare different loans from different lenders. However, under federal law, lenders are required to disclose a Total Annual Loan Cost (TALC) for reverse mortgages. The TALC combines all the costs and interest into a single annual rate. This allows different reverse mortgages to be evaluated. The TALC calculations and consideration of the specific conditions of each loan better enable you to make the most cost effective and suitable choice to support you during your senior years.