First a little history. In 1988 President Ronald Reagan signed into law authorizing the Federal Housing Administration (FHA) to insure reverse mortgages. However the very first reverse mortgage was issued in 1961 by a Savings and Loans company in Portland, Maine.
In 1969 the idea of a reverse mortgage began to take off with a presentation by Professor Yung-Ping Chen (UCLA) to the Senate Committee on Aging. The main focus of his presentation was to enable older homeowners to remain in their homes either for physical convenience or sentimental attachment. Between 1961 and 1984 a number of studies were conducted with passage of a pilot program called the Home Equity Conversion Mortgage Demonstration in 1987 leading to President Regan authorization in 1988.
The advantages of a reverse mortgage is to allow the elderly to remain in their homes. Proceeds are tax free, the heirs are not personally liable for the loan when the homeowner passes, heirs will inherit any remaining equity in the home after the loan is repaid, there are NO monthly mortgage payments however the borrower is responsible for property taxes, insurance, property maintenance and private mortgage insurance (PMI), social security and medicare are not affected.
Some cons to the program are: fees are higher than with a traditional mortgage; need base programs such as Medicaid and Supplemental Security Income (SSI) can be affected; the loan becomes due and must be repaid when the loan contract matures, the last surviving spouse passes away, or the borrowers vacate the property for more than 12 months. The loan can be called IF the homeowner fails to pay the property taxes, insurance or fails to maintain the property.
The reverse mortgage called a Home Equity Conversion Mortgage (HECM) can be used by homeowners 62 years and older. As noted there can be NO mortgage payment but the absence of this payment will add to loan amount (added to the back end of the loan).
So it is possible that the loan balance can increase to more than the value of the property. But note this is a government insured loan which is non-recourse. This means that you and the heirs are not responsible for any portion of the loan that exceeds the value of your home, even if the property decreases in value.
PMI today on this type of loan is 2.5% based on the value of the property and is reduced to 1.25% for each year thereafter. The loan can have a fixed interest rate (60% of principal will be the limit) or adjustable in which case 70% of appraised value is available. The PMI was instituted to reduce lender risk if the homeowners default on the loan. However the borrower has a guarantee of access to funds should the lender go out of business.
View the HECM as a home equity loan
Similar to a conventional loan the normal every day loan cost apply. Typically these include appraisals, credit report (however one cannot be denied if credit is poor), flood certification (as applicable), courier fees, escrow/settlement/closing cost, title search, document preparation, endorsements, recording fees, County taxes, Counseling fees, etc.
One item that is different from the normal loan process is that the homeowners must undertake counseling to get this loan. This counseling service is an upfront cost and you are asked various questions as to the homeowners understanding of the loan and its implication. Prior to any action being taken one has to receive a counseling certificate to proceed with the loan process.
When viewing a reverse FHA mortgage with a traditional FHA mortgage the key differences center in keeping seniors in there home, borrower never owe more than the value of the home, no monthly mortgage payments, borrowers are offered set-aside loan funds if they cannot afford obligations of the loan.
Heirs are protected. After the borrower passes, heirs take over the responsibility of repaying the reverse mortgage balance amount. Typically the heirs will simply sell the property and use the proceeds to retire the loan. Other options which the heirs may exercise is to pay off the loan with their own funds and keep the property in the family or possibly converting the property into a rental.
Seek counseling from a reputable reverse mortgage lender before proceeding and you may want to address a reverse mortgage with an attorney.
Who is most likely to get upset with a reverse mortgage? Probably the heirs.